Gold and silver fell hard again on May 5: Gold touched an intraday low of $1463 per ounce (from $1,577 on May 2), and silver fell as low as $35 an ounce (from $49 on April 25.) Investors want explanations, and here are some of the more popular ones:
- ... [the] stronger dollar amplified negative sentiment toward precious metals forged by a 23% dive in silver prices. (The WSJ, May 5)
- Comex...late Wednesday announced margin-requirement increases [for silver futures trading]… (MarketWatch, May 5)
- Major players, including George Soros, are reportedly pulling back from gold and silver (CNBC, May 5)
These may seem perfectly plausible -- until you consider the chronology of the stories vs. the precious metals' selloff. See the problem for yourself.
Silver peaked on April 25, gold on May 2. But the U.S. dollar only got stronger on May 5. New silver futures margin requirements came on May 4. The Soros hedge fund news came late on May 3 -- again, after gold and silver had started to decline.
The most one can say about these news stories is that they pushed the selloffs in the direction prices were going already. The actual timeline shows that the strong dollar, higher margins, George Soros, etc. were not the cause. So what was?
From an Elliott wave perspective, the answer is always: investor psychology.
In the days leading up to the reversals, EWI's Mn.-Wd.-Fri. Short Term Update repeatedly warned subscribers that silver's rally was running on fumes. Here's a chart and quote from the April 27 Short Term Update:
"The intraday high-to-low decline from Monday's $49.91 high (basis spot) to yesterday's $44.60 low was 10%. The...structure of the decline may be counted as five waves, as shown above. We've labeled this decline wave 1 down. Wave 2 up is unfolding…The critical level for this wave count is Monday's $49.91 high, because second waves can never retrace more than 100% of previous first waves. As long as wave 2 ends beneath Monday's high, the odds remain strong that silver will turn lower and fall further. The rush to the exits by the trapped 'longs' should help fuel the sharp and swift decline that always follows the completion of an exponential rise."
The chart and commentary in the May 2 Short Term Update added that silver was "stretched out like a rubber band":
"The Disparity Index is the percentage difference between silver's close and its 40-week moving average, which approximates the 200-day average. At last week's high, the disparity between prices and the moving average had reached 70%, the most extreme since the top in 1980, 31 years ago. The Disparity Index has no absolute outer limits from which prices must reverse, but similar to a rubber band that becomes stretched too far, prices will 'snap back'… The preliminary turn down in the index suggests that the rubber band is snapping back."
P.S. Once you read the May 4 Short Term Update, stay tuned for an instant notification email when the May 2011 Elliott Wave Financial Forecast goes online tomorrow, May 6. The new issue will have a full discussion of how silver and gold's moves fit into the broader market environment and the big picture for stocks, oil and commodities.