Gold and Silver: Prepare for a Short-Term Decline

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Long term, I am extremely bullish on gold, but for the short term, I feel this market may have some more work to the downside.

Normally, gold and silver are the destination of a "flight to quality" during nervous markets, but that was not the case last month. As margin clerks sharpened their pencils, the gold and silver markets fell precipitously in the final week of the commodity decline. Gold surpassed the $1000 mark briefly, but fell to the deflationary forces by declining $100 before recovering in the last full week of March. Long term, I am extremely bullish on gold, but for the short term, I feel this market may have some more work to the downside.

Fundamentally, nothing has changed; we still have inflation, we still have abandonment of the Dollar and we still have aggressive buying of gold bullion. The psychology has changed, as the weak "longs" have lost their courage. Importantly, the exchanges have increased the margins on gold so aggressively that the small players have been forced to liquidate.

Techincally, gold has broken the "up" trend line that has been intact since the August lows. The intermediate and short-term trends are down, but the major trend remains up. Gold would have to drop below $700 before turning the major trend down. This market may have peaked for the first half of the year and will remain range-bound during the next quarter. However, the sixteen-week low was put in last week, and if I am wrong about the market consolidating over the next several months, I would add to core positions on a close above $1000.

Silver...will more than likely follow the pattern of gold and the CRB index. The fundamentals have not changed, but the margin requirements have been grossly increased. Once again, we have politics driving investors from precious metals futures, reminiscent of 1980, when Bunker Hunt was forced from the silver pits. Only five years ago, silver margins were $1500 per contract. That has been increased to $10,000 in the past couple of weeks.

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