Silver and Gold New Rally Underway

March 26th, 2009

By Timothy Silvers

On Wednesday I sent an email alert that I completed my silver and gold purchases at $12.23 and $890. Gold and Silver just seemed too cheap to pass up, so I went "All In". Of course, I didn't know in advance that the Fed would take such a proactive stance to destroy the dollar by monetizing hundreds of billions of United States government debt. Unfortunately, it was probably inevitable that they would do so sooner or later. On similar note, I have to wonder if the large commercial traders had prior knowledge of the Fed's plan to monetize the debt. They would then trigger sharp selling on the futures market Wednesday morning and close their open short positions at a lower price. Conveniently, because the wild price swings happened on Wednesday, the COT numbers including that day won’t be published until this Friday. This is hardly the first time that I’ve seen big price moves happen after the Tuesday cutoff for that weeks’ COT numbers. If there is a better alternative explanation for the sharp sell off in gold and silver that morning, I would be interested to hear it.
Gold Candlestick Chart 032009 At the time I bought, gold and silver were close to breaking through their long standing upward trend line, and I thought there could be a little downside left. However, the Fed’s announcement trashed the dollar and sent investors flocking to gold (and silver) as the most sensible alternative. It looks like the next rally for the precious metals is underway and I have set initial targets of $1075 for gold and $15-16 for silver. This market is pretty wild and every week brings news that moves prices significantly, but I don’t see the metals retesting the lows until they make new highs for the year.

Silver Candlestick Chart 032009

It is hard to see a bearish picture for gold and silver right now. Even Switzerland, whose Franc has almost been considered as good as gold, recently devalued their currency over 7% in one day against the Euro. In the recessionary global economic environment in which we find ourselves, nations are competing against each other to devalue their currencies in order to make their exports cheaper. It is a sad game in which the citizens of those countries end up the losers as the purchasing power of their currency declines. Ironically, most countries want to devalue against the dollar, because the US is such a big importer. That has provided strength to the dollar even though grim economic news would make one think that the dollar should drop in value. The dollar may remain relatively strong for a while longer, but that will not hurt gold and silver. Investors are waking up to the game of competitive currency devaluation and other measures governments are using to decrease their currencies’ purchasing power.
Longer term outlook for the dollar is pretty poor, as the federal government is creating money out of thin air as if by magic. The projected budget deficits and implied increase in the public debt are astounding, and I think their budget numbers are wildly optimistic. Where on earth is the money going to come from to pay back the debt??? They are inventing new ways to increase the money supply in a vain (I think and hope) attempt to get people hooked back on debt addiction. It is not that I want to see more suffering in the US and world economy, but we are simply reaping the whirlwind of 30 years of debt and consumption based “growth”. That type of growth is unsustainable and the government would do better to refocus its efforts on figuring out how to keep the US competitive with the rest of the world, rather than trying to prop up housing prices and encouraging people to buy using money they don’t have. My hope is that people have learned their lesson and will chose savings over debt, and will find more meaningful things in life than materialistic consumption.

The competitive devaluation of major world currencies, the ballooning US public debt, and continuing economic uncertainty are three good reasons why you must own gold and silver. You can be sure that we have not seen the last of the bad economic news. Banks are still sitting on potentially large loses in consumer debt and commercial real estate. About a quarter of Americans owe more than their house is worth. Housing prices have not bottomed and the number could reach 50% of people upside down on their mortgage by the time it’s all said and done. It may be many years before prices have increased enough for owners to sell their house and break even, let alone make a profit. You have to wonder how those people are going to get out from that mess when they are eventually forced to sell. Most likely they’ll walk away, go into foreclosure, declare bankruptcy, and end up renting. If you have the capital, building a portfolio of good rental properties will probably be one of the best investments of the next five to ten years. I’m getting a little off the topic of gold and silver, but it is important to know that as long as banks are forced to take losses on bad debts, they are going to be tight with their lending capital and economic recovery will be slow. Some have said that gold and silver are insurance that you hope you don’t need but you are glad you have if you do need it. We are now at the time when you need to have gold and silver insurance for your financial well being.
Summary

Hopefully you have a solid foundation of gold and silver in your portfolio. If you don’t, it would have been great to buy at the low prices last week but that opportunity disappeared quickly. There is a little more risk if you are buying now, but the up trend looks solid. If you do decide to go long now in a trading position, you have to use a trailing stop so that you don't get burned if the market starts dropping. Also, I don't recommend using much leveage (3 times maximum) which limits profits but helps me sleep at night. The next targets for gold are $1075 and silver in the $15 to $16 range on this rally. If you need some advise on how to buy gold and silver, please reference the end of the article I wrote in July 2007. Much of it is still applicable although it is very difficult to buy small quantities of gold and silver at any reasonable markup over spot. The continued tightness in the physical market is another bullish factor that will help push New York spot prices higher. I saw an interesting chart recently that showed gold bullion selling for almost $150 more per ounce on eBay than the NY spot price. Either the spot price needs to move up or the premium for bullion needs to drop. I’m betting on the former.

Silverseek
http://www.silverseek.com

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