Are Precious Metals Ready to Break Out?

By Raghu Gullapalli


Over the past eight days, the market is up 7% and seems ready for a pullback, especially on the news of poor non-farm payrolls. But one element of the market that seems to be gathering momentum right now is the precious metal segment, namely gold and silver.

Silver -- which, in the humble opinion of this trader, was being accumulated -- looks ready to break out above the $5 dollar range it's been bound to over the past two months.


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iShares Silver Trust (SLV), the exchange-traded fund, is approaching the reentry level set bySmartStops, at $36.71. This may prove to be a great setup in terms of risk reward, as short-term stop on SLV is $34.34 and the long-fterm stop is $33.79. The upside on this trade is substantial, as SLV may well seek out the highs from late April in the days to come. Part of my bullish bias on this trade comes from the fact that during this eight-week period of accumulation the ETF never dropped below its 210-day moving average.


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Gold, on the other hand, has been testing the $1550 level, and now it seems like the perfect storm of variables are brewing to push the metal through this level and possibly even to the $1600 year-end price target set by many market technicians and gurus.


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The depressing US jobs number, the downgrade of Portugal, and the increasing fears of a default by one of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) are the catalysts for this new drive up. The rest of Europe and their myriad of financial institutions have tremendous exposure to these countries' debt, and a single default by one of these countries could set off a domino effect. This would make Lehman’s collapse look like a tempest in a teapot. And in the midst of any storm, people flock to anchors to keep them secure. In these tumultuous markets that anchor is gold, and by proxy, silver.

SPDR Gold Trust (GLD) just like SLV has held strongly above its 210-day moving average and is also offering a good risk to reward trade. SmartStops has the short-term and long-term stops at $146.64 and $145.75 with a reentry into GLD at $151.86


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Silver Is Now a Value Buy

Value investors, such as Warren Buffet, William O’Neil and Jordan Kimmel are all big proponents of the idea of buying low and selling high. All these extremely experienced investors also look at historical patterns and are always on the hunt for bargains.

Or as traders refer to it, “buying into a pullback.”

Since its ballistic drive up in late April to create new historic highs, silver has plummeted down and the market saw the kind of volatility many traders thought gone in the post-financial crisis era. But rather than continue its free fall to price levels that this writer thought were more in keeping with its historic norms, silver defied expectations and has consolidated in a $5 range over the past seven weeks.


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Some peers of mine who are absolutely first-rate technicians believe silver is maturing into a Bear Flag and may indeed seek out historically normal price levels in keeping with the 1:60 ratio of Gold and Silver. Time may prove their premise correct.

As a trader who keeps his eyes on the price action of the players in a sector, I am of the belief that this range has allowed a few savvy investors to accumulate silver at price point they are comfortable at. If you look at the charts of the silver exchange traded fund, iShares Silver Trust (SLV) you will see that it has held above the 210-period moving averages. The first check in favor of a bullish bias.


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With the uncertainty in the markets over the future of Greece and the effect events there may have on other similarly indebted nations, do not be surprised if investors in Europe rally to precious metals before people in US markets do.

Another check in the favor of the bullish scenario is that from a historical perspective gold and silver prices rise in the latter half of the year. This price jump is spurned on by demand from India as my kin buy mountains of the metals to celebrate religious festivals and the peak of the marriage season.

SLV will languish down here only a while longer and may then seek out the $40 price point. Don't be too surprised if silver is back at the highs by year's end. Smartstops has the reentry price for SLV at $37.72 and the short term and long term stops at $32.33 and $31.42.


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Editor's Note: For more, visit SmartStops.net.