The slowly rising prices of gold and silver got a boost last week after the US Federal Reserve announced plans to keep interest rates low till late 2014. Their prices are now near levels where bulls should take some profits.
The metals suddenly caught the attention of investors after the Fed-triggered rally. However, remember that both gold and silver have been moving up since late December 2011. The sudden spurt in prices is not surprising but just a continuation of an existing trend.
Time after time asset classes tend to look "attractive" after a rally in prices and when they are close to a profit target. It is at this point that many retail investors buy these assets after reading news in the mainstream media. However, a look at the charts of gold and silver will show that prices are nearing a previous turning point and can fall again.
Remember, the Federal Reserve has not released any fresh money into the system. The US central bank is running out of ammunition and hence cannot do much to inflate asset prices. Unless the Fed shows the money we'd not bet on a continued rise in precious metal prices. Of course, a market panic can lead to a rally in gold and silver. Till such time, we'd take profits at previous turning points.
Let us look at the silver (see Chart 1 below).
The price of the white metal is nearing a previous turning point between $35 and $36, as shown by the white lines on the chart. Silver closed on Friday, 27 January, at $33.91 and it would be prudent for traders who are long on the white metal to book profits on a part of their positions. We would exit all our silver positions at the $35 level, as there is a high likelihood that prices will fall from that level. Aggressive traders can sell the white metal short anywhere between $35 and $36.
There is also the indicator, the Commodity Channel Index (CCI), which is showing weakness in the uptrend. Notice that while prices are going up the CCI is falling. This shows that the trend is weakening. However, prices can continue to rise for some time while the CCI continues to drop.
For people using the indicator, they'd short silver once the CCI falls below 100. It's right now at 135. However, the best time to short is when the white metal is between $35 and $36 and the CCI falls below 100. However, if silver closes above $36, we'd give up our bearish bias.
Gold, on the other hand, is much closer to its turning point than silver (see Chart 2 below).
. The yellow metal has two resistance levels close to each other - shown by the white horizontal lines. One is between $1,750 and $1,770 and the next is a little above, between $1,790 and $1,810. Just like silver, we'd take some profit on gold right now and exit the full position once prices enter the level between $1,750 and $1,770. Gold closed at $1,737 on Friday.
It's possible that prices of gold could go to the higher turning point, giving better profit. But we'd not wait for prices to reach that level and book profits at the lower level. Aggressive traders can take short positions either at the lower or higher levels. We'd enter at the lower level with a smaller position and add more if prices rise higher. However, if prices go above $1,830, we'd give up our bearish bias.
The CCI of gold is much stronger than silver but notice that it is turning lower even as prices are going higher. This indicates a weakening of gold's upward momentum.
George Albert is Editor, www.capturetrends.com