The penny gold and silver explorers waved a red flag six months ago, now they are furling that flag and preparing to hoist a green one.
It is August and a good time to follow up on my article written in March, "Will gold get compressed".
In it I suggested that the metals would go sideways or compress, but would hold above the March low until August. Below is part of what I said.
If we get a compression in the metals it will be an excellent buying opportunity. The Junior metals companies will benefit even more strongly. I track a few key Juniors which I use to verify the price action I see in the majors and their charts are promising good things to come. They love a nice summer siesta, so keep a little set aside for them.
Silver will benefit as well (in fact I favor it at this time) from the seasonal compression.
If you have not read it, you might enjoy my FSN article Gold Crash in it I suggested gold would make a low around the 102.50 area."
Since March gold was able to push higher but we are now back down to the same level we were in March. Silver has done roughly the same thing and we are at the same level we were at in March as well. This all at a time when Europe imploded and a currency panic triggered a dumping of the Euro. Through all this, we still compressed.
What was causing the compression is coming to an end and a new leg up is about to begin. Austerity is today's watchword but as the world economies slow, it will soon go out of favor. There is too much debt and without some form of stimulus there will be no way to pay the interest on it. It is my opinion that the Federal reserve is in real trouble and will do whatever it takes to restore their balance sheet. Right now they are gaming the world economy by moving their foot from the gas pedal to the brake and then back to the gas again. They know when they are going to change direction and they are front running the coming change by speculating in the markets. Soon they will be stomping on the gas again.
Today I am going to focus on silver and will use a chart of slv to explain my thinking.
In my March article I mentioned that the junior explorers would benefit more than the metals themselves from a compression and in a subsequent article (Deflation a summer overview) I showed how well they were correlated to the gold market, often leading it. I will include a couple of junior charts as well but not their names. They will be available on my blog. So far my call is dead on.
Point "A" is when I suggested that we would compress into August. The yellow arrows show previous compressions around the same time of year. I put in point "B" to show what I don't think will happen this time. I think we will hold the early 2010 low but there is still a chance we go under $16.00 once to clear the panic buyers still holding long positions put on during the crisis in Europe.
Below is a series of stacked charts comparing two juniors (one is a gold explorer and the other silver), with the same SLV chart. You will notice that both have fallen over 50%, that is what I meant when I said earlier in the year that the juniors would benefit more from a compression. Maybe benefit was the wrong word, but when you are a trader and looking to buy low, this is a blessing.
Notice the correlation. In fact the juniors have led the decline most years, even as SLV ground higher. They led the decline this year as well, clearly showing the real situation in the metals markets. If my theory that the compression is coming to an end is correct and the juniors continue to trade in a linked fashion then 100 percent rallies are probably coming.
To wrap up
The juniors are getting cheap again and that is a sign we are nearing a nadir in the metals and their more senior stocks. The juniors are for the most part very high risk investments, many are essentially worthless but they still trade and fluctuate.
Therefore they have to reset to a low price from time to time so that the Fat Boys have room to move them back up and sell them at what seems like a reasonable price, to the investors buying into the company's fundamental story. Remember most want a story, an uptrend and higher prices before they buy, but the price can't be too high. Every market works the same way.
The juniors are telling us to prepare for a new leg up in the metals.
You can beat the computer but you can't do it using conventional technical analysis. Go to my blog, where I explain why.
Markets are manipulated, learn to think like a manipulator. If you are not with them then you are a victim.