Precious metals: now what?

Every time there is a correction is PMs, the gold bears start shouting..'the bubble has burst, the bubble has burst.' So the first graph from the top shows what happens in a real bubble. The first bubble is the gold runup during the Jimmy Carter years. The second bubble is the NASDAQ bubble in about 2000. Compare to this gold price changes the last 2-4 years. We do not see the almost vertical rise in pries at the end of the bubble. There will be a bubble in the PMs, it's just a question of WHEN.


The first graph is important because it gives us clues of how and when to get out of the bubble. The graph shows that the bubbles ended the same way. When the top was reached and prices peaked, we saw a drop of about 30-35% of the final blow off, then a 35% recovery of the drop then a further drop. While gold prices did drop, they still remained above the pre-bubble level. The lesson for PMs? We may not know the exact top, but if we miss it, then we can unload during the recovery peak. The Jimmy Carter gold bubble unraveled after the election of Ronald Reagan. The Obama bubble will pop if he is defeated (or looks like he will be defeated). If he is re-elected, the scenario does not bear thinking about.

The next graph shows the changes in gold prices in the correction. This was a steep correction. Is it over? I do not know for sure, but I think so. If not, we are close to the bottom.

The graph of the silver prices is the next. Again, a steep correction of about 38%. Here is a description of what happened: 1. many investors know that the prices run up to a new high twice before the price busts through the third time. The approach to $50/oz was the second run up, so a lot of investors sold some holding, including myself. The CRIMEX and the CME used this opportunity to lower silver prices to save some banks and others who were short silver. They did this by increasing margin requirements five times, which forced these traders to dump their holding (mostly paper). As silver prices began to fall, stop losses were triggered and more stuff was sold. So, paper silver was decimated, but actual silver is still hard to come by.

Silver and gold miners were shorted by hedge funds and some short covering may have happened during the silver correction. The next graph shows that gold is once again rising in relation to silver. The silver miners are also rising in relation to silver (penultimate graph).

The last graph is the actual spot price of silver with the RSI (relative strength index). Drops in silver prices are noted by small blobs on the RSI graph. The first drop was in July 09. Silver prices dropped below the 50 DMA and the 200 DMA. The word was out: 'the bubble has popped.' The next significant drop was in 2010 and silver prices again dropped below the 50 DMA and the 200 DMA. The next two drops occurred this year, one in March and one in May. This time the price dropped only below the 50 DMA. It occurred on very large volume and Seeking Alpha had an article every day about PM prices were going down from hereon.

According to some experts I read, the reversal in silver prices will begin this coming week, between Monday and the end of Wednesday.

A final comment about fundamentals. Precious metal prices are rising, because of the wrong-headed fiscal policies of the Obama regime and its European counterparts. May 16 is the date when the Treasury officially runs out of authority to borrow more money, because of the debt ceiling. A few more weeks and Sec Treasury Gaithner runs out of tricks to avoid the hard reality of facing the reality that the govt is broke. I don't want to make predictions about the political machinations that will take place to force the Republicans to agree to lifting the debt ceiling or do away with the debt ceiling altogether. We are also witnessing the continued saga of Greece and Portugal trying to borrow more when their credit rating is zilch. Greece may even leave the EU and face certain default. All these are reasons for people to trust no paper currency any more than they trust the governments who issue them.