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Precious Metals Creeping Higher

10/26/11 08:39:37 AM
by Billy Williams

The markets took a hit on Tuesday, but gold and the other precious metals are creeping higher.

Security:   SPX, GOLD
Position:   Buy

At the beginning of October, the market outlook was poor across the board, not just for equities but also for precious metals. Metals like gold and silver had been a highly sought-after refuge from the currency instability across the global landscape and the specter of the European debit crisis, but earlier this month, the shine had been tarnished on all metals as they declined sharply. Later, it was reported that hedge funds and large institutions that had large deposits of gold in their holdings were faced with margin calls during the steep decline earlier this month, forcing them to liquidate their metal holdings to raise cash. See Figure 1.

Now, gold is beginning to show signs of life as Randgold Resources (GOLD) (Figure 2) surged higher on improved trading volume. Not far behind, silver began its footing, as companies like Silver Wheaton have started to rally higher and challenge previous price highs. If silver goes on to make a series of higher highs and higher lows, then the trend reversal will have been confirmed as the bulls take control of the trend and take its price higher.

FIGURE 1: SPX. The SPX took a big hit today, but its price movement is still heading upward and is due for a pullback in price before it goes on to challenge the overhead 200-day SMA that acts as resistance.
Graphic provided by:
Currently, however, stocks stumbled on concerns that European Union (EU) leaders won't succeed in arresting the debt crisis. The latest headlines from Europe cast doubt over whether leaders can agree on a comprehensive solution for the region's debt crisis in time for a summit on Wednesday, October 26. Europe's ongoing debt crisis has been behind much of the market's big moves lately.

European officials are working to patch together a plan that will prevent banks from taking huge losses if the Greek government defaults on its bonds. A messy default could lead to a credit freeze similar to the one in 2008 following the fall of Lehman Brothers, except the Europeans will add more zeroes to their total losses this time around.

Mixed earnings and worse-than-expected economic data didn't help.

FIGURE 2: RANDGOLD. GOLD rallied higher as fears of a market downturn plagued the global markets, forcing investors to flee to safety.
Graphic provided by:
The NASDAQ tumbled 2.3% and erased all of Monday's gains and also closed back under its 200-day line. The Standard & Poor's 500 lost 2% and the Dow Jones Industrial Average (DJIA) 1.7%. NYSE volume rose, giving the NYSE composite and the S&P 500 a distribution day along with the NASDAQ volume declining.

However, the overall market is still in a confirmed uptrend and is due for a slight price pullback as it prepares to challenge the 200-day simple moving average (SMA) that lies over the current price. The 200-day SMA will act as resistance that price will have to challenge and pierce with strong follow-through if the bullish trend is to stay in effect.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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