Two Scenarios Right Now for Gold and Silver

Larry Edelson | Monday, January 6, 2014 at 7:30 am

Are we there yet? Has gold bottomed? Has silver bottomed? If not, will they bottom this month?

After all, we’re in January, the month I have pegged for a major low in precious metals, the end of their three-year bear market.

It’s a bit too early to say, as it’s only the 6th of January. But here’s what I see based on the latest developments in gold and silver, which are important.

First, the recent action in gold and silver couldn’t be wilder. On the last trading session of the year, Dec. 31, gold plunged more than $17 to within $5 of cracking the June 2013 low, and within a whisker of making a new low for its bear market.

But then suddenly in the last few hours of the year, gold rallied sharply, closing out the year on the nearest futures contract, the most reliable price for spot gold, at $1,202.30. The action in silver was similar, with silver closing at $19.37, after reaching as low as $18.72.

On Dec. 31, gold came within a whisker of making a new low for its bear market.

And so far, in the first few days of trading in the New Year, gold and silver are largely holding their gains and continuing to chop around.

So what does the action mean? Has gold bottomed? Ditto for silver.

Or, is a January low off the table now, since both metals have rallied?

I see two scenarios right now for gold and silver. Ranked in order of probability, they are …

First, the recent rally is nothing more than another bout of short-covering, one that will soon give way to another crushing decline.

This is what all of my indicators are telling me. In fact, when a market’s destiny is to break a major support level, often you will find it move back up first. That way it sucks in the long positions to gather enough energy to spit them back out and turn them into panicky sellers when the next decline comes, thus giving the market enough energy to break through the major support level.

Second, the recent rally could be indicating a cycle inversion.

Sometimes cycles do invert, and where a low is forecast, a high comes instead. Then, the following cycle peak also inverts, and instead of producing a high, it produces a low.

Cycle inversions are rare, but very important. They most often appear near critical market junctures.

Breaking the June 2013 low in gold and silver is a critical market event, no doubt. That means we have to watch the market very closely now, as the recent rally could be indicating a cycle inversion.

So how will we know which of the two above scenarios are unfolding?

It’s actually rather simple: This is where my reversal model comes into play.

If short-term buy signals are elected in gold and silver, the odds will shift from the first scenario to the second scenario, a cycle inversion.

On the other hand, if gold and silver fail to elect any buy signals, the cards will still be set for major lows heading into the end of the month.

But if buy signals are hit and gold and silver do not make new bear market lows this month, the final lows in gold and silver may be pushed all the way out to May of this year.

I know this isn’t what you want to hear. We all want the metals to bottom as soon as possible so they can get back to bull market mode. But it is a possibility so I have to mention it.

The key signals to watch if a major cycle inversion is about to form are $1,285 in gold and $21.40 in silver. If those levels are taken out and closed above at any time, we will be facing a cycle inversion and the lows will be postponed to May.

We have to listen carefully to what the markets are telling us. And right now, gold and silver could be in the process of forming a cycle inversion, that if continued, may delay the final bottom until their next major cyclical turning point, which is in May.

Again, I know this is not what you want to hear. Many will say I’m merely unsure of the markets, or that I’m a stopped clock that’s right twice a day and I probably won’t declare the bottom is in place until gold and silver stage a major rally.

But I can assure you, neither is true. I know these markets like the back of my hand. They either bottom this month — still the higher probability — or they rally a tad and bottom later, in May.

Either way, gold and silver’s short-term bear markets are not complete, but will end this year. The only question now is whether they end this month or in May.

This month is going to be very important for the metals and mining shares. I will keep you posted.

Best wishes,

Larry