Plunge in Gold, Silver Just a Healthy Correction

By: Rick Ackerman
Rick’s Picks
Friday, October 8, 2010

Bullion bears had better not get their hopes too high in the wake of yesterday’s nasty plunge in precious metals. The price of an ounce of gold on Comex fell $40 from high to low, or about 3%, and silver fared even worse, falling from 23.53 to 22.47, or nearly 4.5%. We see this action as purely corrective, however, since none of the factors that have been driving silver and gold higher have changed. For starters, the Fed remains committed to massive new rounds of quantitative easing, which can only feed on itself by driving buyers away from future Treasury auctions. The global financial system is further roiled by Japan’s abortive efforts to hold down the yen, and by China’s simultaneous efforts to push it up. Bottom line, the world’s major currencies, all of them fundamentally worthless, remain in a hopeless state of chaos relative to each other. If that is bearish for gold and silver, then this week’s toxic spill in the Danube is bullish for Hungarian tourism.



We’d anticipated short-term trouble for bullion in yesterday’s commentary, which bore the following headline: A Hair-Trigger Alert for Bullion-Watchers. The trigger we were referring to was a rally in the U.S. dollar, which has been in a relentless decline since early June. Were the dollar to reverse direction with a dead-cat bounce or perhaps something more, that would put downward pressure on gold and silver prices. This dynamic was present yesterday to some degree, although the NYBOT Dollar Index (DXY) began the day on weakness, breaking beneath some Hidden Pivot supports we’d flagged for subscribers. This occurred overnight, but when U.S. markets opened Thursday morning, the dollar reversed sharply, and that’s when gold and silver began to fall in earnest.

Some Clues

Although it’s impossible to predict exactly how far the dollar will rise, Hidden Pivot analysis over the next two or three days should yield some useful clues. For now, we can tell you that DXY’s move off the launching pad was not particularly impressive. Powerful rallies typically begin with unpaused thrusts that exceed at least two prior peaks on the hourly chart. If you look at the chart above, however, you’ll see that DXY pushed past only a single peak yesterday, and that it has needed to pull back for a running start before taking on a second (#2). While it is speculative at this point to pronounce the rally dead on arrival, it will quickly sink into the dead-cat-bounce category if subsequent thrusts over the next few days fail to live up to our two-peaks rule.

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Dan