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While Gold and Silver are currently both overbought, John’s charts this evening show that each could surpass last week’s record highs over the near to short-term and reach extreme overbought conditions before a correction sets in.  How this would play out with the stocks is uncertain – the CDNX actually declined 1.3% last week while the TSX Gold Index was off 1.7%.  It’s as if the stocks have already started to factor in a coming correction.

What’s perplexing about Silver at the moment is that despite its parabolic move of late, commercial traders’ short positions have dropped to their lowest levels in many months – the commercials are hardly ever on the wrong side of the trade, so this is very interesting and suggests Silver may have further to go on the upside over the near-term despite weakness this evening.  As of 8:50 pm Pacific, Silver is down a whopping $4.11 an ounce to $43.83 while Gold has dropped $18 to $1,548.

Bottom line – be prepared for high volatility for both Gold and Silver.

The U.S. Dollar is rallying this evening on the surprising and tremendous news that Osama Bin Laden, the face of terrorism and anti-western hatred, has been killed by the U.S. military in Pakistan – an historic and momentous moment indeed.  This is certainly cause for celebration and has the potential of triggering a significant short-covering rally in the greenback but the “big picture” outlook for the U.S. Dollar remains grim.

John: Many times I have warned our readers that a stock price or index level had risen too far and too fast from a supporting moving average and thus were vulnerable to a correction.  Tonight we are going to look at the positions of Gold and Silver with regard to their obvious overbought situations. How susceptible are they to immediate corrections?

In order to analyze the charts I am going to use an indicator known as %B. This indicator quantifies the relationship between the price and Bollinger Bands. First we have to determine the primary trend which for both Gold and Silver is up. We now identify an appropriate supporting daily moving average which is SMA(300) for both.

Because we have an uptrend, %B can be considered oversold when it moves to or below 0.5 and is considered overbought when it reaches or exceeds 1.0.   Now look at Chart #1 immediately below – Gold (continuous contract). This is a 10-year daily chart with both daily SMA(200) and SMA(300) shown. I have also shown %B(200,2.0) and %B(300,2.0). For our use I have selected the %B(300,2.0) because, except for the crash in 2008, all the values are above 0.5 which means the price of Gold (POG) was above its SMA(300). Anything below 0.5 is considered oversold.  If we identify the POG price peaks (vertical green lines) we see they correspond to a %B(300,2.0) reading between 1.25 and 1.35, thus we can expect the %B value to rise to at least 1.25 before we can expect a peak followed by a major correction.

Friday’s %B level for Gold was 1.11.

Chart #1 (Gold through April 29)

For Silver (continuous contract) we look at Chart #2.  This again is a 10-year daily chart and we again will be using the %B(300,2.0) indicator.  This time we see the %B band identified between 1.3 and 1.6 with price peaks often occurring around the 1.6 level.  With Friday’s %B level at 1.26, Silver still has room to move up before it is expected to peak and correct. I have also shown 3 gradients and presently the Silver price is on the 3rd and steepest gradient so we can expect a peak and correction later this year.

Conclusion: I expect Gold and Silver to climb higher before peaking and then correcting.

Chart #2 (Silver through April 29)