Gold looks good here, but silver looks even better

The big-picture pattern in gold strongly suggests that a major correction within the 1999-2011 bull market transpired between the September 2011 high of $1,921.50 and the June 2013 low of $1,180.04. In addition, a new bull phase will occur and should propel gold to new all-time highs in the weeks and months ahead.

By Mike Paulenoff
Aug. 30, 2013, 8:28 a.m. EDT
Market Watch

The big-picture pattern in spot gold suggests strongly that a major correction within the 1999-2011 bull market transpired between the Sept. 6, 2011, high at $1921.50 and the June 24, 2013, low at $1180.04. In addition, a new bull phase, or upleg, is in its infancy that should propel spot gold to new all-time (nominal) highs in the weeks and months ahead.

With the foregoing in mind, the June-August up-move of 22% ($254) is at a bit of a crossroads as the rally has entered an important resistance zone at the intersection of the flattening 200-day exponential moving average (EMA), now at $1425, and the nearest-term resistance line at $1415.

If any forthcoming weakness in spot gold can hold above $1395-$1390, the pattern off the low will remain exceptionally powerful and promising, and will argue that the next up-move should propel prices toward a test of the major breakdown plateau at $1522-$1527, on the way to $1560-$1590.

Only a decline that breaks $1360-$1350 will compromise my current very constructive outlook for gold.

Silver, arguably, holds more promise than gold, if only because our work on the gold/silver ratio favors the relative outperformance of silver. We analyze and track the Sprott Physical Silver Trust ETF PSLV -1.15% , which has been in an up-move since Aug. 7.

On Monday, Aug. 12, PSLV gapped up from its prior close at $8.15. All of the action between June 20 and Aug. 12 represents an "island cluster reversal," which in English means that a gap on the way down in June has been matched by a gap on the way up in August that has separated the entire timeframe from the rest of the chart.

As we noted to members on Aug. 12, this island cluster reversal has the potential to be a technical game-changer for PSLV, i.e., an indication of a major bottom in the physical silver ETF, which so far has proven accurate.

That said, however, we noted that PSLV certainly has challenges directly ahead (actually, overhead) starting at the $9.40-$9.80 resistance plateau, a sustained hurdle of which should trigger a very powerful buy signal.

Sure enough, since reaching near that level on Wednesday, Aug. 28, the ETF has pulled back. Wednesday's downside reversal and Thursday's downside follow-through in PSLV, in sympathy with the correction in the precious metals and the miners, should find support and new buying interest in the $9.10-$9.40 target zone. This is where I am expecting a powerful upside reversal to propel PSLV above the flattening 200-day EMA at $10.00, on the way to $11.00-$11.20.

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