The XAU (Gold and Silver Index) dropped from 160 to 125 on a closing basis, or 120 on an intra-day basis during that time. Not much fun, to be sure- but not much to worry about in the medium and long term, either.

The bottom of the wider trading range established since February of 2006 has held. In fact, on a closing basis, it hasn’t even been touched.

The HUI (AMEX Gold Bugs Index) reveals a very similar picture, but we won’t look at it in chart form here. While all of this is happening, gold is quietly building a very nice pennant base (red) for its next breakout while confidently staying in the mid to upper range of its (green) uptrend channel:

The dollar is probing multi-decade lows,

... and the Dow is getting the hickups from the carnage in the housing market:

Do you see the ‘rounded backs” of all these incremental advances? That’s what I call a contrived bull market. Each one of those advances is just begging to turn back down - but, nooooo! The plunge protection team can’t allow that to happen. They’d be out of a job.

Someone should use a plunger on them. Maybe Ron Paul?

Interesting to note is that this series of ‘rounded backs’ began back in July of last year, when the gold price began its contrived flat-lining stint.

However, that flat-lining was only apparent. Care to see how powerful the gold price was during this “controlled” period? Just ake a look at this chart and its successive pennant formations:

Pennant #1 (red) was a decidedly droopy one which is usually seen as bearish. Gold broke out to the upside of it. Then #2 (blue) was a little less droopy, and gold also broke out to the upside. Now we are in #3, which is far more bullish than the preceding two and is getting tighter and tighter as we speak.

Guess where gold is going from here?

If gold is going there, can the shares go the opposite way for long?

But what happened to silver?

Silver’s formerly prodigious advance seems capped at every turn. It doesn’t have a neat pennant formation to show off, its 50 day moving average (blue line) has slipped below its 200 day MA, and it even shows a dangerous double top.

How can that be for a metal that is for all effective purposes in a physical supply shortage?

How can silver be actually threatened while gold looks more and more golden as time moves on?

Well, what may be approaching here is a huge buying opportunity - for the patient ones among us. The impatient ones will sell their silver - and needlessly take the losses associated with it.

Silver has already broken through its third uptrend line line (green, #3) early this year. Clive Mound in his article from May 2007 has called the double top correctly. It is now only a dollar or two away from breaching trend line No.2.

From there, though, it would have to go all the way back down to the $5 range to breach its bottom line support dating back to late 2001. I very much doubt that will ever happen - but just watch the lemmings getting shaken out when silver goes below $10.00, which could happen any day, now.

All the more reward for the non-lemmings.

Naturally, a strong gold rally can rescue silver from its descent at any point in time, and it probably will. It only goes to show that gold is really the king of the metals, even though silver certainly has its place as a fall-back currency in any full-blown economic catastrophe.

Are you scared yet?

If you are, there’s nothing wrong with being scared. The one thing that is wrong, however, is to be scared into selling your silver - or God forbid, your gold.

Got gold?

1 September 2007

Alex Wallenwein
awallenwein@gmail.com