Cautiously Optimistic on Gold and Silver

The Fed and the ECB appear to be out of the picture for now, sitting on their hands as the economic data continues to deteriorate. This triggered a decent bounce in both Gold and Silver just as everyone was ready to throw in the towel. “Is the bottom in place now?” is the question I am getting most in the past 24 hours. My answer is: I don’t know. I have no confirmation that we hit bottom. 

I warned everyone on Sunday, Dec. 3, that Gold and Silver were about to get hammered:

The rest is history. I was able to make this call based on extremes I witnessed in the multiple tools I use in my FIPEST process, such as technicals, sentiment, and in this case, positioning above all. The problem now, following this bounce in the metals, is that there is no clear signal one way or the other. But what is clear is that Gold and Silver fell short of the extremes to signal that a bona fide bottom was in place. Simply put, I am not confident that the low is in. We could head back down again to even lower lows. The alternative scenario is that this rebound is just a B wave bounce and we’re heading down to sub-1900 levels in Gold and sub-21 in Silver.

But given the extremely bullish big picture for the metals, you should already have ‘some’ physical metals in your investment account and may want to consider adding some more here in case the low is in place.

Gold Futures 

Gold is extreme overbought in the short-term, so there is likely to be an opportunity to buy on a reversal. Place stops below the low at 1988. 

Silver Futures

The same goes for Silver. Place stops on any long trades below 22.79.

The signals I am looking for to confirm the bottom is in or close are as follows:

1.      Extreme bearish sentiment. When it’s not in the toilet, but in the sewer. People throwing in the towel left and right. 

2.      Extreme oversold or positively divergent technical indicators on the daily chart, and preferably the weekly chart too.

3.      Approaching support levels. For this I use Fibonacci retracement levels in conjunction with technical analysis: prior peaks and troughs, major support trendlines, and 200-day and 200-week moving averages.

4.      COT positioning. When Funds minimize their net long positions or even go short, while the Banks minimize their short positions or even go long. The speed at which they change the relative positions is also a warning signal. If the Banks are racing to get long, that’s a good sign that the metals are about to bottom and turn up.

We didn’t hit any of those. But given the big picture, it is prudent to add some physical metals to your investment portfolio here given the inevitable rally to much higher levels. I just don’t have any confirmation that the low is in, and until then, I remain cautiously optimistic that we’re going higher.