On Friday, January 5th gold dropped nearly $20 while silver slid 60c. Those huge drops had all the earmarks of a selling climax, and I said so at the time. See my January 5th and 11th interviews with Jim Puplava, which were posted by him on January 6th and 13th.
A selling climax is easier to identify after the fact than when you are in it. But, it is important to try identifying them when they occur because they are important market features. A selling climax denotes a major turning point that marks the end of downtrends or corrections.
Gold price action: have we seen a selling climax?
It is now one week after the January 5th collapse, and the evidence continues to build that it was indeed a selling climax. Most important is the big jump in gold and silver this past Friday. Also, as Bill Murphy reports in his latest Midas commentary:
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'The Commitment of Traders gold report was nothing less than breathtaking and represents one of the largest changes of positions I can recall. Lately, this report has been a non-event. Not this time...
The large specs decreased longs by 15,482 contacts and increased shorts by 9,533.
The commercials increased longs by 13,680 and decreased shorts by 17,093 contracts.
The small specs decreased longs by 3,760 contracts and increased shorts by 1,998.'
Bill then goes on to say: 'The Gold Cartel has done its thing AGAIN, fleecing numerous longs out of the market.' I wholeheartedly agree. I describe how the gold cartel does this in a recent commentary posted on GoldSeek.
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Bill concludes: 'With the gold open interest where it is, we have a set up to flush out many more spec shorts, while, as the market moves up, spec longs pour in. The fundamental and technical set up for both gold and silver could not be better.' Again I wholeheartedly agree.
The evidence is building and taken together suggests that gold and silver's test of major support on January 5th was successful, and as a consequence, the lows reached that day will prove to be a major turning point.
Why the gold price jumped last week
This past Friday's price jump was the result of two things. First, the ever-vigilant shorts, who are prepared to turn on a dime to protect their capital, are already running for cover. Second, the consolidation since the May highs in gold and silver have shaken out a lot of investors, and the panic buying on Friday indicates that they are trying to re-establish their long positions.
All of this market action bodes well for the future. However, we are not out of the woods yet, as we can see on the following charts.
Silver is clearly the more bullish of the two charts. As a result, look for silver to continue outperforming, which means that I expect the gold/silver ratio will continue falling.
Gold's fundmentals are still good
Now, do not go out and bet the ranch on my comments above. Markets - indeed, the future - are unpredictable. All we can do is evaluate the underlying fundamental factors for a market, and then ride with the trend.
The dollar's fundamentals are bearish, as is its long-term trend. Though it has had a short-term bounce, the Dollar Index is hitting overhead resistance, so the odds favor a resumption of its long-term downtrend.
The underlying factors driving gold and silver remain bullish, and its long-term trend is pointing higher. And now their short-term downtrends are in the process of turning higher too.
When the precious metals confirm the turnaround by clearing previous resistance levels, I expect gold and silver to begin new short-term uptrends that will carry them both to new multi-decade highs, and perhaps even more importantly, confirm that their low price for this year has already been made.
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