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Why are gold and silver falling? When will the correction be over? How low can gold go?

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There is a good chance that the correction will end this week, or early next week.  The bullion banks always find a way to hit gold and silver prior to options expiration dates and the Feb options expiration for gold is Wednesday.  The first notice for the Feb contracts is next TuesdayPrecious metals have traded virtually straight down in January, though gold actually topped a couple days after QE2 was launched, while silver topped at year end.

There is support in the $1,320 area on the daily chart and long-term uptrend support at $1,300 on the weekly chart below, so it is likely that the next low will develop at or above one of these support levels

The gold chart suggests that if gold falls below $1,342 it could fall to the $1,320 area where there is support or at $1,300 where there is long-term support on the weekly chart.  It is likely that the next low will develop at or above one of these support levels.  A worst-case scenario would be for gold to go as low as $1,214-$1,148.  I deem that to be highly unlikely, but from a strictly technical point of view, that’s what the charts are telling us now.

Rick Ackerman says $1,322 will be the low but $1,217 is a worst-case bottom for gold. These numbers tally with our analysis.

Silver topped later than gold and so it has had a bit more downside price action.  On the overbought/oversold measures, both metals are due for a sharp rally.  On a MACD measure, selling pressure may be exhausted for now.

The selloff has nothing whatsoever to do with the supply and demand for bullion; rather it is due to hedge funds using leverage to speculate in the short term and the concentrated short positions of Wall Street banks being investigated by the CFTC.

(Bloomberg) –Bullish Gold Bets by Funds Slump on Worst Price Slide Since 1997
Hedge funds are unloading bullish bets on gold as a slide in prices sends the metal to its worst start to a year since 1997. Holdings in silver dropped to the lowest since February.

Managed-money funds held net-long positions, or wagers on rising prices, totaling 134,473 contracts on the Comex in New York as of Jan. 18, U.S. Commodity Futures Trading Commission data showed on Jan. 21. The gold holdings have plunged for three straight weeks, dropping 21 percent since the end of December, while net-long positions in silver are down 24 percent.

Gold has fallen 5.7 percent this month, which would be the worst start to a year since a 6.3 percent drop in January 1997. The metal rose every year for the past decade, reaching a record of $1,432.50 an ounce on Dec. 7 as central banks kept interest rates low and Europe’s debt crisis spurred demand for the metal as a haven. Silver climbed 84 percent last year and reached a 30-year high of $31.275 an ounce in New York on Jan. 3.

From a technical standpoint, we’ve a strong rally in silver and gold, and when you have that type of performance, it prompts profit-taking, said Brian Hicks, who helps manage $1 billion in the Global Resources Fund at U.S. Global Investors Inc. in San Antonio. Money is going elsewhere to the more traditional areas of the equity market.

Appeal of Metals

The slide in gold and silver may not last, Hicks said. Prices may rebound on concern that Europe’s debt crisis will spread, and that record-low U.S. interest rates and the biggest budget deficit ever will fuel inflation, Hicks said.

Prices are close to a short-term oversold area, Hicks said of the decline in gold and silver. “We’re starting to become interested at these levels. The perfect storm is continuing to build for precious metals.”

Managed-money positions include hedge funds, commodity- trading advisers and commodity pools. Analysts and investors follow changes in speculator positions because such transactions may reflect an expectation of a shift in prices.

Excerpts from the 2011 Barron’s Roundtable

Every year, Barron’s gathers some of the best minds in the business to discuss their views for the year. This year, the investment pros are cautious. As a group, they expect 2011 to be a year highlighted by high inflation, soaring gold and continued money-printing.

Here are quotes from Bond King Bill Gross, manager of PIMCO, the world’s largest mutual fund;  Marc Faber, noted bear and editor of the Gloom, Boom & Doom Report, andFred Hickey, a highly respected technology analyst. 

Gross: Of course the economy is falling apart! You are taking the corporate side. What about the side of Main Street? Of those who are unemployed and can’t find a job?

We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and laborers of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately, creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

Faber: … the Fed will keep real interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn’t value their wealth in dollars because one day, in dollars, everyone will be a billionaire.

Fred Hickey: A year ago, people were talking about an exit strategy. I knew there wasn’t going to be one, ever. The economy has structural problems and we aren’t dealing with them. Money-printing won’t work, yet that’s the prescription we continue to give the patient. If the Fed keeps printing after June, we’ll have higher gasoline and food prices and more imbalances until this ends. And at some point it will end, because the dollar will fall apart. What we are doing now makes everything appear rosy. But it is a devastatingly terrible policy for the long term.

Sincerely,

David Schectman

Miles Franklin

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