The recent massive sell off in both gold and silver formed a recognizeable chart pattern on both assets.
After double topping, GLD has now formed a large bull flag correction pattern. GLD also pulled back right to it’s uptrend line from the February, 2011 low. This would seem to indicate that the cycle low for gold has been reached and it will now consolidate within the bull flag pattern. A drop to the rising support line should be viewed as a buying opportunity but it couldn’t hurt to accumulate GLD within this range if you don’t already own any.
SLV is exhibiting a similar chart pattern although it hit a lower secondary top and has been correcting for a longer period of time. SLV did not quite make it to it’s uptrend line from the 2008 bottom. SLV could possibly work it’s way down lower within the bull flag to meet the rising uptrend line but I suspect the cycle low for SLV has been made. Since SLV has been correcting longer, it will in all likelihood break out to the upside before gold does and will lead the charge in the next leg up for precious metals.
Right now the markets are in turmoil and the economic futures of Europe, the U.S. and China are unclear. It appears that the central banks of the world will have no choice but to flood the markets with liquidity. The Fed has stated that further intervention may be necessary in the near future and that can only mean one thing: increase the money supply. The ECB is also about to drop interest rates and will have to perform monetary easing in order to bail out the Euro Zone.
The Dollar has exhibited some strength lately but it has not by any means bolted out the door. While the downtrend from the January top has been broken and UUP is trading above it’s 200 day ma, it may be forming a small head and shoulders pattern. There is also immediate downtrend resistance at about 22.75. In any event the recent sell off in commodities would indicate that a stronger dollar in the short term has already been priced in. The dollar is in a long term bear market and even if it rallies in the short term it is ultimately headed lower. The U.S. cannot afford a strong dollar at this point so Ben Bernanke will be forced to do whatever is necessary to keep it weak.
Conclusion: The fundamentals for owning precious metals seems stronger than ever. Central banks will have no choice but to keep interest rates low and print money. The current correction in gold and silver should be viewed as a buying opportunity. Precious metals appear to be one asset class that can be bought and held for the longer term.
In regards to the broader stock market, there are a lot of negative technical readings on the charts but the floor at S&P 1100 may be the low for this cycle. There are still a ton of bears out there and everyone is expecting the market to fall apart. It is unclear if the current correction is like the one we saw in 2010 or if we are heading into a 2008 scenario.
September is typically the worst month for stocks and it is just about over. If we can make it through the end of the month without experiencing a complete breakdown there could be an upside market surprise heading into the fall. Some indications of this would be Europe getting it’s act together, the U.S. leading indicators not pointing to a recession, further Fed action, and China not coming apart at the seams.