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A Pre-Election Precious Metal Price Cleanse

Friday October 26, 2012 09:55

A Pre-Election Precious Metal Price Cleanse

As the upcoming presidential election looms on November 6th, the recent 'correction' lower in gold and silver came once again as the COT report showed short positions held by Commercial Traders increasing notably as the net long positions held by large and small traders also grew.

Furthermore, not only were they running substantial short positions, but it seems as though the Commercial traders, which consist primarily of big bullion trading banks, needed to print a price under the 1735 level in gold — which corresponded to the 32.50 price level in silver — in order to trigger some substantial stop loss sell orders.

The rather predictable result was a sharp, but short lived, stop loss fuelled decline in both of those precious metal markets, as the weekly price chart below shows.

Figure 1: Weekly candlestick chart for the price of Gold, with the COT report breakdown shown in the indicator box below the price action.

Shaking Out the Weak Longs

Overall, this downside price action looks pretty typical of a mid-rally attempt to shake out weak longs by the chronic precious metal shorts.

Nevertheless, once the commercial traders have managed to shake out as many as they can of the weakly held speculative traders that have only recently established their long positions, their typical trading pattern will be to start covering their shorts once the stop-driven downside move loses momentum.

Also, most of the longer term traders who have been accumulating silver and gold in the hopes of an upside breakout will probably be covered enough by their recent gains to stop worrying about a temporary correction and hang tight in order to keep making money on the long side as the market recovers.

Handle Target

The prevailing chart pattern shows that the ‘handle’ of this correction will probably be completed in the very near term. Initially, the handle target was in the region of $1688.00 for gold and $31.50 for silver.

Nevertheless, despite this recent correction, the current outrageously bullish technical picture for the precious metals supports the view that strong support seen at the $1720.00 level for gold and at the $32.50 level for silver will hold.

This is the perfect sort of price action to accompany the declining volume numbers.

Price Corrections Present Opportunities

Price corrections like this can serve certain behavioral needs of market manipulators since they tend to undermine sentiment, as they also deflect attention and momentum away from the precious metals sector.

Still, letting the big commercial players trigger sell stops like this can actually be a rather good thing. It just creates some much needed buying opportunities for smart smaller traders.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit http://www.silver-coin-investor.com

By Dr. Jeff Lewis,
Editor, Silver-Coin-Investor.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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