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Technical and fundamental analysis: gold and silver

The price of gold bullion reached $1720 per ounce briefly on Asian markets on Wednesday. This was its highest level in more than a month. By lunchtime in London, it had already eased back to about $1700 per ounce. Silver bullion also climbed – in fact, it has now already gained more than 13% compared to the price one month ago.

News that European finance ministers decided to cancel a meeting scheduled for Thursday 27 October saw the price of gold surge by more than 3% over the course of three hours on Wednesday afternoon. This was despite the fact that the planned summit of EU leaders will go ahead as planned.

At the same time, the S&P 500 index dropped by 2%. Gold traders in London were quoted as saying that it was the first time in weeks that gold had traded inversely to shares.

If we look at the chart below we see that gold briefly touched 1921 on 6 September before virtually collapsing to 1532.65, which was the lowest price on 26 September. It recovered significantly during the day and closed at 1626.40.

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After that we saw a period where the price moved mainly sideways, but on 23 October it broke through the blue Kijun Sen line and since then we have experienced a mini bull run. Right now, on 27 October, it trades at 1726.

The price has moved into the ‘wait-and-see’ area of the Ichimoku Kinko Hyo cloud. Any significant break above the cloud might be the start of a new bull run, but if it closes below the recent low of 1603.25 it reached on the 20 October we might see further drops in the price.

Silver (see chart below) also dropped significantly during September – mainly on the 22nd and 23rd, when the price dropped from nearly 40 to close at 30.805 on the 23rd. Since then it has recovered somewhat and is now trading at 33.645. We need the price to break through the Ichimoku cloud before a long trade becomes advisable. Any new low could well be the start of a new bear phase.

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The question is often asked nowadays whether gold and silver are still ‘safe havens’ or not. It can best be answered by referring to the charts below.

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On 1 January 2007, gold opened at 607.85. The current price of 1726 represents a growth rate of close to 184% over 58 months. The recent price correction suddenly does not look so bad at all and the long-term prospects remain very positive.

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Silver started at 14.24 on 1 March 2007. The current price of 33.625 represents growth of 136% over a period of 56 months – not quite as good as gold, but much better than can be said of most stock exchanges.

However, the price of silver has dropped significantly since May and a longer-term trader should probably wait for it to recover to a level above the blue Kijun Sen and red Tenkan Sen lines in the last chart before going long again.

Published: 1 November 2011

You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.

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