Jeff Clark, Casey’s Gold & Resource Report

We released our 2010 Silver Buying Guide last week and the silver price promptly cratered. So does this change our view of gold’s shiny cousin? Hardly.

While industrial uses comprise about half (53%, according to GFMS) of silver’s demand, making it susceptible to bigger falls than gold in a weak economy, it is equally clear silver also responds well to inflation, as well as serious financial “dislocations” (to put it nicely).

There are many examples of this, perhaps the best being the late 1970s. The economy in the middle of that decade was going nowhere, so some investors dumped their silver holdings because demand would supposedly be weak. A big mistake, as we now know, because silver’s greatest advance occurred at a time industrial demand was, at best, flat. Instead, silver rose due to monetary concerns and rampant inflation, giving investors 500%+ returns in the latter part of that decade, with an easy chance for even higher gains.

So if you’re buying silver to protect yourself against inflation and out-of-control government spending, then – as Doug Casey is fond of saying – sit tight and be right.

Still, it might be useful to contemplate how far silver could fall, particularly if you don’t own enough and are looking to add to your holdings.

The following chart examines all the major corrections in the price of silver in the current bull market (2001 to present). I only included corrections greater than 10%, many of which were big and sudden, much like we’re experiencing now.

You can easily see how volatile silver has been. Yet amidst all that volatility, the price has risen 334% from its 11-21-01 low (as of May 21).

Based on this data, we can make some projections. Our recent high in silver was $19.64. Therefore…

These projections cast a wide net, to be sure, but there are still some conclusions we can draw:

Prognosis? Excellent.

Since we don’t know where the next bottom is, one effective way to handle purchases is to buy in tranches. You could place limit orders at a couple different levels.

But we might save the Big Purchase for a true fire-sale price, something greater than the average sell-off. There won’t be a big flashing light that says “Buy Now!” when the bottom forms, but the bigger the drop, the easier it will become to ease into the market.

Easy? Yes, if you have lots of cash (we currently recommend in Casey’s Gold & Resource Report that one-third of assets be in cash). That big stash is going to give you the ability to load up on the cheap.

If you don’t have a significant amount of Federal Reserve notes saved, it’s not too late to start. And I’ll bet you a six-pack on a Tahitian beach you’ll feel differently about this sell-off if you have a big pile of cash waiting to deploy.

The big SALE! may very well be on its way. I hope you’re getting ready for it.

What silver investments are we buying on the corrections? Check out our 2010 Silver Buying Guide, which includes a list of the dealers with the cheapest prices on all forms of physical silver, a brand new silver ETF recommendation, and the two best silver stocks in the world. You’ve got nothing to lose – a one-year subscription to Casey’s Gold & Resource Report is only $39, and you can try it risk-free for 3 months here.

Gold Scents

I know this is hard to do, especially when one is weathering draw downs. And of course a liberal dose of gloating from the bears during these times doesn’t help either. But let’s not get sidetracked by the little things and let’s face it, the haters are going to show up every time gold corrects. We really should be used to that by now. They’ve been doing it for 10 years.

The cold hard reality is that gold is still in a secular bull market and the naysayers are having to ply their trade from ever higher levels.

So let’s take a look at what’s really happening shall we.

By Jordan Roy-Byrne, CMT

Recently, I had written about how a deflationary impulse in the capital markets would be a catalyst for the gold stocks. This turned out to be accurate as stocks and commodities weakened while treasuries and the US Dollar advanced. Gold and gold stocks also moved higher. Nevermind the comments I received about how we are in an inflationary period and Gold will go down in a deflationary period.

The typical mainstream view is that for Gold to do well reflation needs to take hold. Banks need to lend and velocity of money needs to pickup. Gold can’t do well if assets are declining. This is what many were saying back at the end of 2008.

Fast forward 18 months and Gold has soared to a new all time high with Silver and the gold stocks close behind. Stocks and commodities have gained but only marginally. The US Dollar is about flat. Bank lending and consumer credit continues to decline. Why are the precious metals performing so well?

Deflationary forces can weaken an economy severely and in turn, exacerbate government finances. This is how a sovereign debt crisis becomes a currency crisis. We have deflationary forces in the US, Europe, the UK and Japan. Yet, unlike ten or twenty years ago, governments are in a terrible fiscal situation. Hence, the market sees this and sees that currency depreciation is inevitable no matter if a government defaults or hyperinflates. In smaller and weaker countries, this scenario can play out in weeks or months. For the western world, it will play out slowly  over a span of years.

Interestingly, the decline in credit and the money supply serves to exacerbate the problem. Here is why. Initially (and as we are seeing now), the market begins to recognize monetization and currency depreciation. Eventually this will lead to higher inflation. Yet, tight credit then restricts new production and supply. As a result, supply shortages emerge. This is the hyperinflationary spiral that results from deflationary forces and an over-indebted and essentially bankrupt state.

When the economy bounces or recovers, Gold underperforms commodities and sometimes stocks. Remember 2003 to 2007? Remember what happened from March 2009 until recently? This is why reflation is not good for Gold.

In the months ahead, as the global recovery struggles to sustain and deflationary forces persist; don’t get caught on the wrong side of the trade. Ill-informed or biased observers will take any weakness in Gold as a sign that a major deflationary downturn is on the horizon. Such folks may include Gold in with the rest of the commodity spectrum, unaware of the major fundamental differences. The smart money will use any weakness to increase their positions and load up, knowing that the point of recognition is close at hand.

In closing, there is one point I’d like to make about the gold stocks. The chart below shows that when Gold outperforms both Industrial Metals and Oil (as its doing now), it is a very good sign for the HUI/Gold ratio.

Gold Futures – 4 Hour Candle Stick Chart
The price of Gold is testing a key support level. I figure we will see gold try to stabilize over the next week or so as it digests the recent drop in value then start to head back up.

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Chris Vermeulen

Considering the chart above, gold appears overbought and prime for a drop.  The relative strength index is at 72.68 and above the 70 level which would normally be a sell for us.  Although we always load up heavily on gold when the RSI is on or below 30, we never sell when the RSI hits 70 during major rallies.

Why?  Well, simply because when gold decides to go on a run it generally disobeys the RSI overbought reading as it simply continues higher.

A textbook case of this is during that run to $1225 in late 2009, the RSI was well above 70 in early November while gold was just $1100.  Selling in early November because of the RSI reading would have missed a whole $125 move upwards.  And shorting the yellow metal at that time would’ve proved fatal.  With this example fresh in our memories, we will not sell gold when the RSI gives us a sell signal during major rallies, and the current RSI reading 72.68 does not deter us from being long gold.

Prior to breaking the $1033 major resistance with a follow through to over $1200, gold broke the $720 mark which was previously another major resistance.  From $720 gold subsequently rallied to $1033, a move of over 40%.  Gold made another 40% move when it surged through the $500 barrier to $720.

One may infer from these observations that we are presently likely to get another 40% move.

Considering the breakage of the $1033 resistance area, this gives us a gold price for the present move of $1446.20.  This is a rough estimate but it would not be unreasonable to expect gold prices to move up towards $1400/ounce during this major rally, and then when one factors in the possibility that these large moves could become even larger than 40% as the gold bull market progresses and becomes more volatile, prices higher than $1400 appear possible.

We normally look to the ultimate inverse gold price indicator, the US dollar, for more clues on what gold prices might do and when.  But since gold and the USD have recently been moving up together, this analysis technique isn’t too helpful.  However, investors should not lose faith in the gold bull market simply because this inverse relationship hasn’t worked recently.

One should keep in mind that in the last gold bull market, gold and the US dollar moved up together, so it is likely that this could happen again.  Also, the fact that gold is rallying in spite of USD gains is a sign of great strength in the yellow metal.

We think that in the long term, as the USD resumes its bear market down trend, gold prices will continue to move higher.  In the shorter term we believe that if the Euro should find its footing and begin to rise, as a result of perceived improvement in the sovereign debt issues in Europe, the USD will drop back slightly and gold price will likely take a hit.  For now, gold has become a safe haven investment sparked by unstable conditions in Europe.

An improvement in European debt conditions would likely take away some of the premium presently given to gold.  However, if this should occur we expect gold’s price decline to only be temporary, since USD weakness will ultimately drive gold prices higher.  Essentially this could work out as a win-win situation for gold, albeit with the second win scenario of EURO improvement slightly delaying gold’s rise.

The bottom line is that the major rally beginning with the break out above the previous all time high of $1033 is not over yet.  We will likely see $1300 plus very soon.  And, we believe that gold did not recently break above its December 2009 high of $1225 just to rally to $1249.  There is more to come!

As we are now trading at all time highs, we are in unchartered waters.  Volatility should be expected, and in large doses.  Short term, gold could drop back to $1185.  Ideally, however, we would like prices to consolidate at these current levels so that $1225 will become a support level and a base for the next move up.

So far in 2010, all eyes in the gold market have been looking up at $1225 wondering whether gold get back to that all time high?  Now that question has been answered yet another arises, where next for gold?Our answer to that question is that we believe this rally still has gas in the tank to run higher.  Gold didn’t break its resistance at $1225 just to climb another $24 or 1.95% to $1249.  There must be more in this move.

GLD – Gold ETF Trading
Gold continues to trend higher at an accelerated rate. Friday we saw gold pullback and test a key support level then bounced to close in the middle of the days trading range. As you can see the trend line support has become very steep and once the trend line support is broken I figure there will be a sharp drop to digest the recent rally.

SLV – Silver ETF Trading
Silver popped and tested a key resistance level from a previous high as expected. It also tested the top of its trend channel providing even more resistance. This week will be interesting as we wait to see if precious metals have a small pullback or continue to rally.

Chris Vermeulen

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by Tyler Durden

Just in case you are worried that all those gold coins you have buried in your back yard will never be accepted as (il)legal tender, here comes Abu Dhabi with a gold ATM machine, making gold-based “currency” transactions one step closer. This is a harbinger of things to come, as people increasingly demand to transact in non-daily violatable pieces of paper. This is also the nightmare scenario for all central banks, which have to be seeing developments in the precious metal space, and finally realizing that in the absence of prudent monetary policy, the people, as we noted yesterday, will take (non-dilutable) matters into their own hands. The Fed dilemma: recognition that the fiat “race to the bottom” has to be contained (unlikely) or confiscation of precious metals (see Roosevelt executive order 6102).

From the AFP:

There’s no mistaking what’s in this vending machine. The well-heeled in the Gulf can now grab “gold to go” from a hotel lobby in the United Arab Emirates, when the need for a quick ingot strikes.

On Thursday, a day after its inauguration, the shiny machine attracted spectators of many different nationalities who gathered to watch whenever an enthusiast was struck with the urge to splurge on a bar of the precious metal.

Abu Dhabi’s Emirates Palace Hotel became the first place outside Germany to install “gold to go, the world’s first gold vending machine,” said a statement from Ex Oriente Lux AG, the German company behind the vending machine.

“In addition to one-gram, five-gram and 10-gram bars of gold, the machine also dispenses gold coins,” it added.

Gold rates are constantly updated inside the shiny machine — itself gold-plated — in the hotel’s lobby, courtesy of a built-in computer connected to a dealer which sells gold online.

“This eliminates the risk premiums usually associated with precious metal trading,” the German company said.

Hotel general manager Hans Olbertz said they wanted the hotel to be the first in the world to offer guests what he called “this golden service.”

The Emirates Palace is often used by visiting foreign dignitaries, and its top floor is reserved for the rulers of the UAE federation’s seven emirates, each of whom has his own suite.

by Tyler Durden

The only question now is who will hit 36,000 first – gold or the Dow. Sorry Bernanke – you can’t have both. The good thing with gold is that unlike stocks, gold actually trades after 10 am, unlike stocks, when just the liquidity rebate algos churn ultra high volume on ultra bankrupt companies during that time. Also, breakouts are actually validated by high volume, unlike stocks where the opposite is true as banks hope to fool gullible mom and pops into throwing their money into the Keynesian fire pit.