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A Quick and Short-Term Update on Gold and Silver

(May 10, 2004)

Dear Readers:

I apologize for not writing a full update, but I will do it as soon as my actuarial exam is done with this Thursday.  Hopefully, this will be a quick but efficient read.

I know a number of readers of these commentaries hold gold or silver mining stocks in their portfolios, either in the form of individual stocks or mutual funds (or even bullion and coins).  The action in gold and silver over the last six weeks has certainly been depressing, as the following chart of the HUI clearly shows:

Gold Bugs Index

The HUI is now clearly oversold per the stochastics, with the 50-day moving average just recently crossing below the 200-day moving average.  One's intepretation depends on whether one believes gold is in a secular bull market or still stuck in a secular bear market that extends all the way back to January 1980.  My guess is that it is the former.  If the HUI is to follow its recent experience from early 2001, then we are now clearly in an area where we should at least experience a short-term bounce.  This can be seen in the following chart:

Gold Bugs Index

The first three circled areas were areas where the HUI had signficiant corrections and where it got so oversold that the 50 DMA briefly touched or crossed the 200 DMA.  If we are to follow recent experience, then both the gold price and the HUI is clearly close to a bottom here - with a futher possible decline - but which should come in the next few trading days, as this is also coinciding with the current huge negative strength in domestic equities.  Any subsequent bounce in the gold and silver mining stocks should coincide with a bounce in domestic equities.  To put it briefly, we should either crash or bounce strongly in the next few trading days.

In the following paragraphs, I am going to try to hazard a guess at short-term support levels for both gold and silver and a couple of mining stocks - Newmont Mining and Pan American Silver.  It is not scientific by any means, but it has proved to be a reliable and efficient method over the last few years or so.

The first chart shows the monthly gold price on a candlestick chart.  Please note the huge support level at $365 for gold.  Since a candlestick chart also tells you the intramonth, intraweek, and intraday prices, that means the price of gold should hold $365 not only on a closing basis, but on an intraday basis as well.  If recent experience holds true, then the price of gold should decline another $10 to $15 at the most.

Price of Gold

Applying the same analysis to the premier gold mining stock, Newmont Mining, would mean a support level at $30 to $31.  Newmont Mining closed at $35.41 on Friday - meaning the stock should suffer a further price decline of $4 to $6 at the most.

Newmont Mining

Now, let's look at the price of silver.  Silver is inherently volatile, but I would be quite surprised if silver falls straight back down to the long term uptrend line (a very flat line shown towards the bottom of the chart) which implies a price support of $4.75 or so.  I don't think the recent price spike is a fluke, given the huge price increases in other commodity metals as well, such as copper, iron, steel, aluminum, and nickel.  My guess is that the steeper trend line will hold for now, which will put the bottom on silver at $5.40 or so (only 20 cents below the closing price on Friday). 

Price of Silver

This analysis also extends to Pan American Silver, as it is difficult for me to envision it falling straight down to $8 as implied by the following chart.  My guess is that the absolute bottom (for now) for Pan American Silver is the psychologically important $10 level.  Note that PAAS closed at a price of $11.73 on Friday.

Pan American Silver

Now, bear with me here but writing this allows me to gather my thoughts carefully and to be quite objective in my analysis.  I believe my conclusion is that gold and silver should both make a short-term but significant bottom in the next few trading days, as they are all very oversold (including the mining stocks) and they are so close to my support levels.

Like I said before, any further downside will come in the next few trading days, as this will also coincide with huge negative strength in domestic equities.  Domestic equities, however, are also very oversold and should bounce very strongly after the negative strength has gone away.  This should also coincide with a significant bounce in gold, silver, and in the mining stocks.

In the event that the price of gold and silver crosses beneath my support levels in a very convincing way (such as gold declining to $350 and staying there for an extended period of time), then we will need to seriously re-evaluate our bullish position on gold, silver, and on the mining stocks.  But since support levels have not been broken yet, my current advice would be to not panic and to stay with your metals and your mining stocks for now.

Signing off,

Henry K. To, CFA

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