Sunday, December 5, 2010

Failed Head & Shoulders/Double Top (Gold/Silver)

In an update on November 27th I suggested that Silver might be forming a double top. It's a pattern that formed at the peak of both the 2006 and 2008 spike and I thought it could be the case it was going to form this year as well (based on timing and size of previous moves in the last two spikes). While I provided it as a possible scenario, I am of the belief that we are entering/have entered the 3rd phase of this bull market where previous rules don't apply and we are going to see a lot more volatility. It will be much more difficult to predict short term price movements.

On November 29th in the comments of the November 27th update I had this to say:
While I've pointed out that there is a potential double top forming on the Silver chart, it is actually my personal opinion that Silver's fundamentals will win this time around and that we will see higher prices by Christmas. If this did happen I think it would be an indication that we are at the business end of this bull market and a true parabolic move would not be far away.
The same day on Kitcomm (a discussion board) I said:
The potential for the double top though should keep buyers wary until the Silver price has clearly broken out one way or the other. A close above $28 IMO would mean the double top is unlikely to play out.
The day after these comments (November 30th) Silver closed at $28.02, this was the signal indicating the double top wouldn't play out and that we'd soon be looking at higher Silver prices.

Some other commentators had been talking about the head and shoulders pattern forming in Gold. In my opinion the close on Friday at above $1410 was a confirmation the pattern has failed and that new record high prices are just around the corner.

So with the breakouts we now wait and see what next week brings, I would suggest higher prices. I think record highs for Gold and 30 year record highs for Silver next week are very likely.

Lastly, here is part of an interview with Eric Sprott that I found worthwhile:
Why Eric Sprott sees silver as the next big investing windfall
You have been a bull on gold from the get-go. Is its price over $1,350 (U.S.) unfolding as you expected?
It’s been the investment of the decade. When I bought gold, I was buying gold to hold [as a long-term investment]. As it turned out, it quintupled. I didn’t think it would go that far because no none would have imagined that the central banks and governments would get themselves in a position where they are printing money.

The printing of money makes gold more valuable. You don’t have to be a genius to figure this out. The Johnny-come-latelies – the Paulsons, Einhorns and Soros – all figured out, when [the Fed announced the first round of quantitative easing], that they should own gold. It becomes more obvious every day as you see these financial challenges that we have in Europe.

How high will gold go?
I think gold is the reserve currency today. There is not a currency in the world that it hasn’t appreciated against by at least 300 per cent. And it has beaten every stock market. You can’t even rent a safety deposit box in Germany because they are all full of gold and silver … I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it. It could go to $2,000 an ounce. I could imagine it at $5,000. I am not giving a time frame on that, but I could certainly see that happening. But the real story now is silver.

Why are you more bullish on that metal?
Gold has traded at a ratio of 16-to-1 to silver in terms of price, but today it trades in the range of 50 to 1. I think the gold-to-silver ratio is going to go back to 16 to 1 given the passage of time, say three to five years. And I bet you that silver overshoots. The gold-to-silver ratio may even get down to 10 to 1. I believe that the price of silver has been suppressed.

How much of your wealth outside of Sprott Inc. shares are in bullion and precious metals stocks? 
I only own funds and gold and silver. I am probably 90 per cent in precious metals personally. And I don’t lose sleep over it.


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.


  1. Good call BB. The head and shoulders on the gold chart was the clearest I ever seen.

    Silver looks like it's on a moon shot.

    I'm liking PIR, MML and AUC on the ASX at the moment but thinking they might have run too far already. What do you think?


  2. Hi BN, thanks for the comment. I agree the H&S was looking very clean wasn't it. As they say though, in a bull market the surprises are to the upside!

    Had a quick browse over those stocks, they do look a little overbought, can't say I would personally look too far into them. For their market caps they don't seem to have large resources, though by the looks PIR and AUC both have a large amount of ongoing drilling which could prove up more.

    Currently my African plays are SBL and GDO, which are both at different points (SBL nearing plant commissioning and GDO already producing), may be worth investigating these two if you are researching for buys at the moment, in my opinion they are well priced at today's share prices. As always though DYOR.