Both gold and silver were headed to new lows until the EU summit announced another plan to save the European Union and its unified currency. Markets were clearly starving for some indication that action will be taken to address the crisis regardless of how flawed the plan may be. Markets roared higher as the media played its part to announce a plan that will solve the crisis and lead the world back to prosperity. Now that the dust is settling and the details of the plan are being analyzed and debated reality is showing we are nowhere near a workable solution. Next week is important as some progress must be made by July 9 and this will influence market direction.
The FED is another critical element influencing market direction. The markets were pricing in an expectation that never materialized and markets moved lower. We are now experiencing the same thing with the EU summit where markets are moving lower as reality settles in. I am not bearish by any means and my point of this article is to communicate that it’s all about timing. What we are looking at is an extended buy opportunity as markets move lower on bad news.
The silver market continues to show extremely bullish signs and these signs are validated by the strong single pops in price. Silver is in position for a strong rally, but a catalyst is needed to trigger the event. That trigger must involve an expansion of the ECB balance sheet or the FEDS balance sheet. We know that the FED can’t make a move until the US Presidential election is over and the ECB has disappointed the markets by not announcing a bond buying program to support the results of the EU summit. The bad news will continue for a while as the EU summit proposal falls to pieces and Greece runs out of money and is bounced from the EU.
What I can say is the volatility will increase even more at that point as assets are liquidated to raise capital for margin calls (which is bearish) and the breath of the crisis triggers another EU summit to work on another solution involving the creation of more debt and some sucker who will buy it (which is bullish). We also have a slowing US economy where the number of companies reporting a bearish outlook is starting to increase (Which is bearish). Just checkout the 2012 forecast for the following companies:
- Pall (PLL), Nucor (NUE), Ryder Systems (R), Proctor & Gamble (PG), Cardinal Health (CAH), Texas Instruments (TXN), Starbucks (SBUX), Autodesk (ADSK), FedEx (FDX), Jabil Circuit (JBL), Bed, Bath & Beyond (BBBY), and Adobe Systems (ADBE)
Then there’s the jobs report the shows we are just muddling alone as congress is now paralyzed and unable to do anything to help until the election is over. We also have the start of earnings for the quarter starting next week so it will be interesting to see if the news from Alcoa and the EU will be bad. If so, this will also put pressure on gold and silver prices.
We are still in a period where patience should be used in order to take advantage of good entry points. This will allow time to build capital to make bigger purchases on dips. For gold, I like $1550 or lower as a good entry point with a cut-off at $1575.
I avoid chasing rallies as they are short lived until after the US Presidential election is over and the FED expands its balance sheet. As for silver, I think we are still in for a move close to the 200-day moving average at $23 dollars, which will be viewed as a huge buy opportunity .
If the news from Alcoa and the EU is bad silver will take a hit as it is still controlled by the paper markets. I would hold all long-term and physical positions, stack more cash, and wait to see if silver drops below $26 dollars. If the move lower materializes it will be a good entry point as I expect silver to explode higher on any news of currency debasement.