Silver and Gold Sinking: A Buying Opportunity?

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Silver and Gold Sinking: A Buying Opportunity?
At a time when gold bugs see every price dip as a buying opportunity, it's important to look at a larger picture

By Vadim Pokhlebkin
Fri, 14 Jan 2011 18:00:00 ET

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You wouldn't know it by looking at all the "We Buy Gold!" ads on late-night TV and your local pawn shops, but gold and silver have sold off hard since the beginning of the year.

On January 20, gold fell as low as $1,342 an ounce, and silver broke below $28. Those are still lofty prices compared to a year ago -- but for gold, it's also a 6% decline since the start of the year.

Why are precious metals falling? Reasons given by mainstream experts include China taking control of inflation, satisfactory results of recent bond auctions by Portugal, Spain and Italy, and Ben Bernanke's confidence in the strong U.S. GDP numbers this year. All that translates into "growing investor confidence" and falling gold and silver prices, say analysts.

But how quickly do you think these "bearish reasons" would be brushed aside if gold and silver reversed and started to rally? Not long at all. If you're an experienced market observer, you know how easy it is to pick out a dozen "bullish" reasons from the day's news pile to justify a sudden price reversal. "Fundamentally"-based explanations only "work" until they don't.

If you're looking for an independent perspective, you've come to the right place. Elliott Wave International's monthly Elliott Wave Theorist and Elliott Wave Financial Forecast have chronicled the extreme sentiment readings in gold and silver during 2010, the slowing upside momentum in gold since 2006, the lagging action in mining stocks, and the 30-year non-confirmation by silver.

Leading up to the latest peaks in metals, EWI's president Robert Prechter warned subscribers in the December 15 Theorist not to trust the metals' "bullish fundamentals." Bob wrote that in case of silver, for example, the reasons cited by today's bulls -- that "...silver mostly comes as a byproduct of other mining, that there are new uses for silver invented every year, and that much industrial silver is used up and not recovered" -- are true, but they also were 30 years ago, when silver bulls justified their bullish bias with the very same reasons.

"Every one of these statements was -- and still is -- correct," writes Prechter in the December 2010 Elliott Wave Theorist. "If markets followed the rules of mechanics, silver would have risen to the moon for the stated reasons [since 1980]. But silver had already peaked at $50/oz. two years prior... and it didn’t start rising persistently until 2001, 21 years after the peak. To this day, it has not matched its peak price of 30 years ago. Yet the bullish fundamentals, those 'primary causes,' have remained in place the whole time."

And in his latest, January 11 Elliott Wave Theorist, Prechter's revisits gold and shows you a graph that "explains why gold in 2010 was so much lonelier in making an all-time high than stocks, commodities and real estate were in 2006, when everything was making an all-time high simultaneously."

Here at EWI, we've been closely following the long-term juncture in gold and silver for a while. Our most popular subscription package, The Financial Forecast Service, shows you exactly what we make of gold and silver's recent move -- including a specific, actionable forecast for gold and silver in the new, January Elliott Wave Theorist. It can all be on your screen now via a risk-free subscription to The Financial Forecast Service. Learn more >>

Tags: Ben Bernanke, gold futures, gross domestic product (GDP), hyperinflation, inflation, Robert Prechter, safe haven, sentiment, silver futures, Sovereign Debt, technical analysis

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