Sunday pre-game, 1/22

Greetings, friends-

I continue to believe silver, not gold, will lead the metals over the next few months. So like last week, I've got just one gold chart for you … basically, gold has to get back into the black channel before I'll get excited (currently at exactly $1700).

Note, if gold hits the center of the channel again this year, that would be over $2000/oz. I think the correction that people would expect at $2000 already happened at $1900 (double top, in fact). My guess is, if gold hits the center black line this year, then $2250-2700 would rapidly follow (i.e. the top black line, depending on when it happens) . So if you believe, like I do, that your corrupt ruling class is deathly afraid of exploding gold, we probably shouldn't expect gold to enter back into the black channel without a fight.

Regarding silver, last week I noted a similarity between the big January 2011 correction and the one that capped off 2011 (see blue circles):

Well, silver actually went past my target: see the blue line I drew last week (note, same slope as last January). So, I actually went all cash (in my trading account) as the market closed on Friday. I don't plan on sitting this out long; I will phase back in on red days. However, I felt extra reason to be cautious after the 5% jump Friday, what with the State of the Union and options expiration coming up, plus the FOMC, which has provoked strong sell-offs over the past year whenever QE3 isn't explicitly announced.

I took the opportunity to draw from last week's trading profits to host a special welcome dinner at my house for Robert LeRoy Parker, who contributed a fine post this week.

On the long term weekly chart, two big bullish developments: silver has decisively broken through the falling wedge, and the 34-week MA and 55-week MA have crossed on schedule:

On the long term daily chart, I'll be keeping my eye on these two trend channels (dark, light blue); the $37.50 crossing point (within 2-3 weeks) seems to be exerting some pull.

One thing I'd like to do (actually its third on my list after picking up jazz dancing and learning how to ride a bicycle) is to come up with an objective measure of the strength and fidelity of a trend channel. The concept of finding long term trends in seemingly random short-term data is on the cutting edge of mathematical statistics, whereas your typical TA chartist will just draw 2 lines and call it a day. Thinking about it, the vertical distance between a channel (on a log chart) is a straightforward measure of "strength" -- i.e. your percent profit as the price moves from the bottom to the top of the channel in a bull market.

To measure the usefulness and fidelity of a trend channel, I suggest two parameters. First, a metric taking in account the number of times a channel has served as resistance/support (with some algorithmic penalty for overshoots). Second, the horizontal distance between the channel, measured in time. Given the assumption that price has to stay within the channel, horizontal distance is the maximum time you'd have to wait after buying at a top before you would break even (and vice versa in a bear market trend). So for example, a big reason why I keep turning back to my "yields paid in silver" chart:

is because of the tightness of the channel horizontally (the purple channel is ~9 months apart). For a counterexample, check out "yields priced in oil"

There's a similar 15 year (!) downtrend, proving that, priced in real goods, the government has been finding it steadily easier to borrow. Moreover, the "strength" of the channel is good (100% profit from bottom to top). However, the horizontal distance on this channel is ~4 years. This makes it far less useful -- except when we reach a boundary. Which we have.

Now here's a logical chain for you. Assumption 1: the downward trend channels in both the "10-yr yield:silver" and the "10-yr yield:oil" chart will continue to hold; Assumption 2: with looming war in Iran (and the believable recent OPEC consensus to floor oil at $100), oil won't go down significantly. Ergo, yields have to start going up. Ergo, silver has to start going up even faster than yields.

Of course, the assumptions need not hold. But note also on the lower part of the chart below that the 10-yr yield appears to have broken out of its green wedge.

We'll have a lot more info to gauge these bullish prognostications when the DOW finally falls from its recent frothy, low-volume upswing (its RSI is at 70). Will the PMs outperform?


m.werneburg said...

Hi, noob PM investor chiming in for the first time. The thinking in this post is pretty convincing, a nice break from talk of conspiracy.

Thanks for publishing this stuff - this website is in my experience unique.

Anonymous said...

I haven't got anything intelligent to say about all of this. It's all way too clever for me, and you know I'm still following the price of gold in Serbian Dinars.

But I did want to say a big 'thank you' for the dinner you held for us all. It was a real treat to see RLP in a suit rather than his usual hoola-hoola-wear. And I imagine that the young lady is now almost entirely recovered from Brian's sake-fuelled insistence on demonstrating how an oyster shell naked short would actually work in practice.

Such a great evening. Next time, my place!