Just a Correction for Gold and Silver

11/02/2010 12:30 pm EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the recent sell-off in gold and silver is a correction in a long-term bull market, and talk of a bubble is nonsense.

The long-awaited correction in gold and silver prices finally arrived. Though normal and most welcomed in a secular bull market, the [correction will] probably depress prices further before bottoming.

That’s nothing to worry about. We remain unfazed by the growing chorus of “gold bubble” provocateurs—many of whom don’t understand what’s happening to paper money, central bank fears of deflation, and the ongoing battle by policy makers to grow the money supply at all costs.

It’s amazing how the bears come out of hiding as gold and silver drop. These bozos had it all wrong over the last ten years and still can’t make sense of the market. So, it’s no surprise that this month’s correction is making some investors nervous, especially those folks new to the party.

The gold spot price reached a high of $1,387.35 an ounce [in October,] and appeared to be heading to the next level of resistance or $1,500 an ounce.

Given the commencement of the correction–and we still don’t know how deep this decline will ultimately be–primary support levels remain at $1,265 to $1,250 an ounce, with additional support at $1,227 to $1,210 and $1,170 to $1,155.

I doubt we’ll test $1,155 on the low band. But $1,300 is likely, and $1,250 might be next. That’s the bad news.

The good news: I don’t think gold will stay below $1,300 an ounce for long. I think this is consistent with other corrections over the past decade, and this time won’t be any different. The risk, as I see it, is that gold might mark time from now until January and trade in a narrow range for a while. That’s not a bad thing and sets us up for the next buying spree.

The silver spot price reached a high of $24.92 [last] month. Importantly, the $24.92 price level has not been seen since the December 1979 to March 1980 speculative rally, courtesy of the Hunt brothers. Twelve months later, silver went from $50 an ounce to $8.25—[and 12 months after that,] right down to $4.88!

Don’t worry. We’re not going to nosedive any time soon. The fundamentals for the silver market are far more compelling today [than they were] 30 years ago. This time, investment demand is booming, and that’s what’s driving this rally.

Silver is just breaking out of its recent range and has outpaced gold since August. I think this broader move will continue as silver will outpace gold over the next 12 months.

The January 18, 1980, nominal high of $49.45 an ounce translates into $140.75 adjusted for inflation. Any talk about silver being in a “bubble” is stupid rhetoric. The price has much higher to go, and my forecast remains $75 an ounce before it’s all over.

But once this thing really starts to move, there’s no telling how far it’ll go. The same for gold, which I believe is discounting the end of the US dollar’s reserve status later this decade.

Subscribe to Commodity Trend Alert here…

Related Articles on COMMODITIES