Short term outlook on gold and silver

by John Lee

04/04/2005

Market Update

The Dollar

We wrote in the last update

The dollar plummeted on the news of $58 billion trade deficit number. The number will only worsen with now record crude. Should dollar rebound from all time low of 81, the most upside we see is 200 DMA of 86

The Fed raised short term interest rate by 25 basis point on March 22, which seemed to have landed temporary support for the dollar. The dollar is close to reaching our upside target of 86. Time to turn bearish on the dollar.

Swiss Francs:

Swiss Francs corrected with a rebounding dollar. The commercials have doubled up their net long position here to 20k contracts. We see downside of Sfrancs to be very limited from here. This is very good news for gold. Instead of going long on Sfrancs, we like Silver's upside better with slightly more downside risk.

Gold:

Gold sold off in late March with a fairly sizable reduction in speculator's net long position.

To those who don't believe gold is money, ask any 3-year-old to compare the above Sfranc and Gold charts! As long as gold keeps marking higher lows along the 200 DMA, it's a matter of time before the important $450 level is breached.

Silver

On March 21 we showed the following chart to our subscribers and commented

Would silver stage a 30%+ decline like April 04? The answer in my view, is NO, for 2 reasons.

1. The past has shown the 30% decline (P1 and P2) happened in days after a peak. Silver has hanged around mid-7's for way too long.

2. Commercials shorts at P1 and P2 peaks have been 95k and 104k respectively. Currently commercial shorts are at 80k, not close to level where the price will be thrashed.

I see silver now not unlike August - Oct 03 (purple circle). In fact August - October 03 commercials are shorting on average of 90k contracts, above the current 80k range. If we go with this assumption that we are in another purple circle, the max silver will go down is 200 dma of around $6.8 (red line). The real treat of this is once the consolidation is over (max 2 more month to go), we will be looking at a new leg up surpassing $10. Last time silver burst out of purple circle silver gained 60%+ from $5 to $8. 60% means from $7 to $11.5, which is consistently with our 1st profit taking level of $12 outlined in the March newsletter.

The latest COT commercials number shows a net short of 55k contracts. Last time commercials were these little (few) net short was early Feb 05 when silver sported the biggest combined 2-day gain (60cents) in this silver bull that began in July 03.

We are at critical juncture regarding dollar, gold, and silver. We are particularly bullish of silver, with the expectation that $8 will be taken out by summer the latest.

XAU

Gold stocks are showing weakness. We would advise a definite rebound above 200 DMA of 96 to add new position.

S&P 500

S&P 500 commercials here are net short a very modest 10k. No hurry to go short on US equities yet. In fact it has held up remarkably well in spite of high oil price. Any relief from oil would send S&P to new high quickly. Conversely, a $60 oil could send S&P 500 plunging to 1,100 or below.