Gold & Silver’s Weak Q3 Should Improve in Q4

by James Brumley | September 30, 2013 9:05 am

The good news is that silver and gold both made gains in the third quarter of 2013, following a disastrous second quarter.

QuarterlyReviewOutlook185[1]The bad news: That rebound didn’t even come close to undoing Q2’s damage. In fact, what little bullish effort we saw from the world’s most precious metals last quarter didn’t even last through the end of September.

That being said, neither gold nor silver are a lost cause for investors in the fourth quarter. Several planets are going to have to line up, however — and soon — if the two metals are to be trade-worthy again anywhere near their current price levels.

One Wild Ride

Just for perspective, the SPDR Gold Trust ETF (GLD[2]) advanced 8.3% in Q3. Not bad, though not a big dent in the 23% plunge the fund gave us in the second quarter. The iShares Silver Trust ETF (SLV[3]) fared even better in the third quarter, bouncing 10.5%, although that’s practically chump change compared to the 31% sell-off silver suffered during Q2.

The bottom-line numbers don’t tell the whole story, however. The SPDR Gold Trust ETF was up more than 15% at one point during the quarter, while the iShares Silver Trust ETF was up around 25% near the middle of Q3.

What happened to up-end the rally so abruptly as of Aug. 28? It depends who you ask.

Syria (remember, the country we almost went to war with) gets most of the credit/blame. Gold was already in rebound mode leading up to that political crisis, with silver in tow. But in something of a complicated and convoluted assessment of how that political impasse would pan out, the pros somehow decided gold was a “buy” leading up to military action, but would become a “sell” when bombs started going off.

As Jon Najarian voiced it then, “You should sell gold as soon as missiles fly in Syria.”

As it turns out, we didn’t even have to fire a single bullet to see gold implode. The iShares Silver Trust ETF and the SPDR Gold Trust ETF rolled over the same day Najarian gave his advice.

Also in play at the time was the U.S. dollar, although the sawbuck itself was at least partially being pushed around by Syrian-rooted stress. Specifically, the U.S. Dollar Index started to surge on Aug. 29, helping gold get a good start on its tumble.

The dollar didn’t continue rallying past Sept. 5, mind you. By Sept. 18, it had lost nearly 3% of its value — quite a bit by currency standards — with the U.S. Dollar Index sliding to multi-week lows as a result.

But by the time the dollar was peaking on Sept. 5, the market had come up with another reason to beat gold down: the Fed’s decision to not taper after all. A continuation of the QE effort had been deemed bullish for gold in the past, but when the market decides to see the glass as half empty rather than half full, it’s going to trade the same way … to heck with logic.

Now What?

As for where a rather zany third quarter leaves gold heading into the fourth quarter, the most important take-away here is simple: Know that gold’s recent price action has practically nothing to do with any real fundamentals. Rather, it has everything to do with assumptions and speculation.

That in itself isn’t a big deal — except for the fact that assumption-based and speculation-based trades are notoriously difficult to handicap, if for no other reason than the underlying emotions behind the assumptions can and do linger.

Be that as it may, there are a couple of chart-based ways to get a grip on gold’s (and silver’s) true undertow here.

First and foremost, know that gold’s recent consolidation around $1,339 per ounce isn’t a coincidence. That level has not only been a key floor as well as a ceiling in its recent past; it’s also squarely in the middle of two important Fibonacci retracement lines and just beneath the key 100-day moving average line.

Putting them all together, though a move above that line could be vary catalytic, a move above the $1,339 mark is going to be very tough to drum up. If we do get said breakout, however, gold could reach the $1,424 per ounce area before hitting a wall.

Conversely, if we gave a few more days of failure to hurdle $1,339, the gold bulls may throw the towel in and let the commodity slip back to the floor around $1,189.

Silver’s not been framed by any of its Fibonacci retracement lines, but make no mistake — silver is at the same inflection point as gold. Its near-term floor is at $18.40, and its upside target is $26.20. This week will be a make-or-break one for the more industrialized precious metal.

Between the two possible outcomes for gold, the breakout scenario is the more likely one. The U.S. dollar still has more working against it than for it (like a continued stimulus and an ugly debt-ceiling debate that once again compels foreign and domestic investors to question the stability of greenback-denominated investments). Plus, the general rhetoric surrounding gold still remains positive, even when it’s falling.

It’s not a rally that’s built to last forever, but the foundation could certainly last for a quarter or so.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. [Image]:
  2. GLD:
  3. SLV:

Source URL:
Short URL: