Gold and Silver to Return to the Limelight
by Ben Kim
Rallies in equities have drawn investors away from the gold and silver markets lately. However, I believe the stock market is overbought, and I expect these precious metals markets to return to the limelight in the near future.
The stock market has attracted more attention from investors with its continuous rallies and news of record highs. The S&P 500 Index, the Dow Jones Industrial Average and other indexes have done well in the past few months. But the Dow has posted the best results of the three, closing at a record 13,556.53 last week. With the stock market appearing unstoppable, investors have poured money in and have turned away from safe havens such as gold and silver.
COMEX gold futures have been rising since the beginning of the calendar year, several times testing resistance at around $700 per troy ounce, but never breaking through that level. June gold rose to $692.50 on February 27, $698 on April 20, and $693.30 on May 7. Since its high on May 7, gold has dropped about $30, falling to the $660 area.
While the stock market's performance has affected gold, the minor upswing in the dollar index has also added fuel to the fire. Gold and the dollar index typically have an inverse relationship, which means higher prices in the dollar index correlates to lower prices in gold.
In the silver market, prices have been able to stay above the 200-day moving average, a very critical indicator that is currently at $12.899 per ounce. While prices recently cracked the 200-day moving average a few times, a major move downward could not be sustained.
Gold and silver actually have held up quite well against the rallies in stocks. While I believe the stock market will go higher, a continual move upward is not likely to be sustained. When the stock market rally begins to taper off and when stocks go into a consolidation mode, I can expect gold and silver to attract more attention as investments.
While gold has fallen lately, the long-term outlook for this precious metal is positive. The dollar is recovering from its previous decline, but I believe it will fall again. Since 2002, the trend in the dollar index has been down, so it's a good bet that the dollar will be headed lower in the future. As the dollar falls, gold should rise. I believe gold can rally to $750 or even $800 by the end of the year. I recommend buying December gold $700 calls at approximately $1,900.
For the short term, I recommend buying silver futures. I will continue to watch the 200-day moving average and base trades on that. The retail investor with a smaller account should trade the CBOT mini-silver futures contract. At 1,000 troy ounces, it is one-fifth the size of the COMEX silver contract. I recommend buying two to three June mini-silver futures at about $12.75, a key support area.
Ben Kim is a Senior Market Strategist with Lind Plus. He can be reached at 800-355-5757 or via email at bkim@lind-waldock.com.
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