Wednesday, 26 October 2011

Precious metals rebound as global uncertainty deepens

Gold managed to break out from its bearish flag formation and sailed right through the $1700 level. Silver, on the other hand, is still within the bearish flag and at the moment is struggling to push through the $33.4 level. For long term investors this is a confirmation of the long term trend in gold and silver (which is here to stay), but for short term investors this may prove to be a good opportunity to reap a few profits by going short.

Fundamentals - Europe Debt Crisis

The European debt crisis is the one making all the news titles, with their inability to decide once and for all for a European rescue plan. It seems that not even a BRIC based rescue plan is possible, as Brazilian officials refuse to aid in this matter. From Reuters:

Brazil on Tuesday rejected the idea of buying European bonds to help ease the euro zone's debt crisis, casting doubt on a plan for major emerging market economies to offer fresh funds for the continent's rescue. 
India and Russia are not interested in offering more funds to help Europe while there was not evidence China planned to chip in, a high ranking official from an emerging market country told Reuters. The official said major emerging powers believe Europe is not doing enough to find a solution to the crisis amid internal bickering.

 The fact is that the European countries are still heavily indebted and most of the European Banks are still under-capitalized and more debt will not break the vicious circle. Same concerns regarding the US massive public debt, which at $14 trillion hangs like Damocles' sword above all our heads.

Fundamentals - Demand from India

Probably one of the most know Hindu festivals, The Diwali, or better known as "the festival of lights", starts today on the 26th of October. Some of the Hindu cultures celebrate the Goddess of wealth "Lakshmi" by performing puja. Gold and jewelry are often used during these ceremonies to represent wealth. Most often, demand for physical gold skyrockets during the Diwali festival.


Gold has managed to break through the $1700 resistance level, after testing for several times the 200d EMA (which is the long term support line).This is extremely bullish for gold, as a new leg in the long term price swing may start (with this one extending to the $2400 are). But on the short term look out for a retest of the $1680-$1685 level.

 For silver the picture is a bit more blurry, as it hasn't yet managed to make a convincing move against the resistance level of $33.4. A prompt breakout would signal another push to the long term record level of $50. Take care if you want to go long silver, and place protective stops very tight.

The bottom line is that the recent moves in the precious metals compound, along with the strong fundamentals still in place (strong demand from emerging countries coupled with real negative interest rates in the developed world) are still warranting an increase in price.

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