Based on the September 16th, 2011 Premium Update. Visit our archives for more gold & silver articles.

Ever wonder what it would take for Greece or the other debt ridden nations to leave the euro? According to a UBS report there are no such provisions. It appears that the only way that a country could leave in a legal way is to negotiate an amendment to create an opt-out clause. That would likely take a long time and would require a negotiation with the entire European Union with possible referenda to be held in some of the countries.

According to the UBS report: “While enduring the protracted process of negotiation, which may be vetoed by any single government or electorate, the potential secessionist will experience most or all of the problems we highlight …(bank runs, sovereign default, corporate default, and what may be euphemistically termed ‘civil unrest’).

Leaving abruptly would result in a lengthy bank holiday and massive lawsuits and require the willingness to simply thumb your nose in the face of any European court, as contracts of all sorts would have to be voided. The Greek government would have to “conveniently” pass a law that would require all Greek businesses to pay back euro contracts in the “new drachma,” giving cover to their businesses, who simply could not find the euros to repay.”

After that hurdle one would wonder who outside Greece would want to take the “new drachma” in exchange for goods that Greece does not produce on its own?

According to the World Gold Council, gold demand, which dropped in the second quarter of this year, is expected to strengthen by the end of 2011 driven by jewelry buying in India and China and recovery in investment demand. Jewelry buying in India and China, which together account for 55 percent of global jewelry demand, remains strong in the short and longer term as the number of wealthy people is expected to grow,
"In the third quarter, we are going to see strong investment numbers, because of the European crisis, the debt downgrade in the United States and poor economic figures coming from the United States, which have created a concern in investors' mind that we may be heading back to another recession," WGC Managing Director for Investment Marcus Grubb told Reuters. Economic worries have fueled investment into gold bars and coins on the western markets in the third quarter, he said.

Central banks, which have purchased 198 tons of gold to boost reserves in the first six months of this year, have kept buying in the third quarter and are expected to continue this trend later in the year.

In addition, it is unlikely that the heavily indebted European counties will sell their gold reserves because the reserves are merely a pittance when compared to their mountain of debt – at least at today’s prices.

To see how this price might change in the future, let’s move to the technical part of today’s essay. We will begin with the analysis of the yellow metal (charts courtesy by http://stockcharts.com).

In the short-term GLD ETF chart above, we see that price levels have moved below the rising support line. There has been a breakdown below the support line based on daily closing prices, but this has not yet been seen with respect to the support line based on intra-day lows. A breakdown below this second support line also appears likely however.

In this week’s long term chart for silver, RSI levels indicate that we are likely seeing the beginning of a bigger downswing towards the 50–week moving average. This is presently close to the $34 level and at this point appears to be a valid downside target. It appears most likely at this time that this local bottom is a few weeks away.

In the short-term SLV ETF chart, we see that a breakdown is visible but it has not yet been confirmed. The situation is clearly more bearish than it has been for the past month. The breakdown which is indicated here has also been confirmed by silver’s long-term chart.

If you consider the signals coming from the market, you will surely notice that the outlook for both gold and silver is bearish. At the moment, we believe that the situation might get exacerbated by the action in currencies. We discussed this on September 13^th, in our essay on the U.S. dollar and gold. To remind just a few points we made:

(…) the situation in the USD Index is bullish this week and quite the opposite is true for the Euro Index. (…) The influence of these currencies is likely to be very visible throughout the precious metals sector. It appears that the key signal to watch for this week is whether the USD Index can retain its upside potential. This would greatly increase the probability of lower precious metals’ prices in the weeks ahead.

This confirms the bearish signals from the precious metals sector itself.

Summing up, the situation in gold is bearish for the short term and is certainly more bearish than it appeared at the beginning of the week. Such a sentiment is now confirmed by the gold market. The current situation for silver is very much the same as it is for gold, which is quite bearish for the short term. Additional confirmation comes from the recent action in both the Euro Index and in the U.S. Dollar Index.

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Thank you for reading. Have a great weekend and profitable week!

P. Radomski

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The USD Index moved sharply higher this week and euro tumbled. Both paused. Is the rally in the dollar and decline in euro over, or was that just a beginning? Where (specifically) they are likely to move and what is the likely impact on the precious metals market?

Mining stocks moved lower this week thus invalidating the recent breakout. How far can they move lower? This update provides detailed targets not only for silver but also for gold and mining stocks.

Finally, in today's issue, we provide the list of specific signals that could change the current bearish short-term picture into a bullish one.

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