Wild action in gold and silver: What it means …

Dear Member,

The action in gold, and silver couldn’t be wilder. On the last trading session of the year, gold plunged more than $17, to within $5 of cracking the June 2013 low, within a whisker of making a new low for its interim bear market.

But then suddenly in the last few hours of the year, gold rallied sharply, closing out the year on the nearest futures contract, the most reliable price for spot gold, at $1,202.30. The action in silver was similar, with silver closing at $19.37, after reaching as low as $18.72.

This morning, in the first full day of trading in the New Year, gold and silver are up sharply, trading at roughly $1,218 and $19.95, respectively.

So what does the action mean? Has gold bottomed? Is a January low off the table now?

I see two scenarios right now for gold and silver. Ranked in order of probability, they are …

First, the late rally on Dec. 31 and today is nothing more than another bout of short-covering, one that will soon give way to another crushing decline.

This is what all of my indicators are telling me. As I noted in a past issue, when a market’s destiny is to break a major support level, often you will find it move back up first to suck in the long positions and gather enough energy to spit them back out and turn them into panicky sellers when the next decline comes, thus giving the market enough energy to break through the major support level.

Second, the rally could be indicating a cycle inversion. Sometimes cycles do invert, and where a low is forecast, a high comes instead. Then, the following cycle peak also inverts, producing a low.

Cycle inversions are rare, but very important. They most often appear near critical market junctures. Breaking the June 2013 low is a critical market juncture, no doubt. That means we have to watch the market very closely now, as the recent rally could be indicating a cycle inversion.

So how will we know which of the two above scenarios are unfolding?

It’s actually rather simple: This is where my reversal model comes into play. If short-term buy signals are elected in gold and silver today or tomorrow, the odds will shift from the first scenario to the second, a cycle inversion.

Those buy signals are $1,226.70 in the gold February futures contract and $20.38 in the active March silver futures contract.

If gold and silver close above those points today or tomorrow, a further rally — into the next turning point Friday, January 10 — will likely occur.

If gold and silver fail to elect any more buy signals heading into that next turning point, the cards will still be set for major lows heading into the end of the month.

But if additional buy signals are hit, the final lows in gold and silver may be pushed all the way out to May of this year.

I know this isn’t what you want to hear. We all want the metals to bottom as soon as possible and get back to bull market mode. But it is a remote possibility so I do have to mention it.

We have to listen carefully to what the markets are telling us. And right now, gold and silver could be in the process of forming a cycle inversion, that if continued, will delay the final bottom until May of this year.

Right now, I recommend you keep your bearish positions on. If gold closes above $1,226.70 today or tomorrow and silver closes above $20.38, I will have you exit those positions and most likely recommend you take on a short-term long position.

Either way, the action in gold and silver this month is going to be very important. Either the metals turn back down and form a major, lasting low, or, we get a cycle inversion, a few months of rally, and then a devastating collapse heading into May. Ditto for mining shares.

Stay closely tuned in …

Best wishes,

Larry