NFTRH Interim Update 8.23.13, Precious Metals Technical Update

All appears to be going according to our script.  The flag on HUI has dropped right to the preferred support level of 260 and looks bullish.

But some measures of sector sentiment continue to be over bullish and silver (the leader) is over bought.  So let’s review the situation as an exercise in sound risk management.

sgr

The Silver-Gold ratio (SGR) shot up to resistance with an impulsive and over bought thrust.  The ill-fated 2012 case is highlighted for reference.  SGR always was going to stop here, but now the question is whether or not the enthusiasm is a limiter as it was in 2012.  It is not as over bought as during that QE hype fest, but it certainly can continue to correct prior to any new upside.

silver

Nominal silver shows a similar basing pattern to the 2012 specimen along with a similar initial burst (green boxes).  The over bought RSI is doing exactly what it did in 2012, by making an initial bump to 70+.  In 2012 it then declined and burst upward to a higher high and an end to the rally.  RSI can still go higher and MACD is not as hysterical as it was last summer.

hgr

The HUI-Gold ratio not over bought and is acting normal.  As noted in NFTRH 252 the bullish case can allow for it to drop to the highlighted area.

hui

The flag consolidation in HUI is thus far a healthy thing.  As noted, the preferred support is 260 and I want to see that hold here.  240 is the next normal support (not noted on this chart) and would be technically healthy as well, because it would clean out the momo’s.

I would personally not plan to get cleaned out and give back a significant amount of gains accumulated thus far.  True blue investors – if they have their own fundamental due diligence ducks in a row – could look at that as a buying opportunity.  Regardless, if HUI were to lose 260 the play might become something along the lines of buy 240 (ish) with a risk tolerance to just below 220.

The chart draws a comparison to 2012 and looks to be at about the equivalent point to the shaded box in 2012.  The state of the weekly TRIX (almost, but not triggered) is the same as it was at the equivalent 2012 point as well.  Judging by the over sold levels that HUI’s rally sprang from, it does not seem logical that today’s non-over bought readings could end the rally.

Hence, there appears to be significant upside still ahead on the HUI (350 +/-) with the question being whether 260 or 240 limits the current consolidation/correction.

gold

Finally there is gold.  This is just an excellent chart and as long as gold remains at or above the noted support at 1350 it will remain excellent.

Bottom Line

All in all, I think what we are dealing with is a question of depth regarding the current chop.  The bigger rally appears healthy from most angles with the non-over bought state of HUI and gold as the positives and the over bought state of silver (and its relationship to gold) as the main negative.

Yet silver has only done what it did in the first half of its hard rally a year ago.  So over bought is one thing, but that’s the thing about over bought; it means that something is bullish.  So we’d want to see the SGR find support at around .016 per the first chart above.  We want to see silver continue to consolidate rather than plunge, [ed., the same way] it did in 2012.  HUI-Gold ratio should hold .185, HUI 260 (preferred) and gold 1350 for the short term cases to remain good.

Another point worth mentioning is that with the stress in the credit markets and gold’s constructive looking real price (Gold-CCI), it might be time to be favoring gold over silver if indeed the forces of economic contraction begin to crop up again.  It is a developing story, and we’ll continue to develop it.  I have noted on many occasions that I am not a silver bug, I am a believer in gold’s value proposition over the long term.

So let’s not get carried away in silver’s initial momentum.  Over the long haul in an era of contracting economies, I’d expect gold to eventually take up the lead or at least make a catch up move vs. silver.  There are likely to be increasing economic and systemic stresses ahead if the credit markets come apart.  Gold would fare better in that environment.