By JW Jones
In the not-so-distant past arguing that precious metals prices were setup to fall generally elicited a response which was not real pleasant. In fact, during gold's infamous bull market rally on several occasions I called for pullbacks which regardless of the accuracy of my call generated hate mail that seemingly never ended.
Fast forward to the present and hardcore gold bugs remain transfixed on the idea that precious metals must rise. The gold bull market has ended, at least for now and those still holding the bag are looking at large losses from the all time highs set back in 2011.
These same gold bugs will cite a litany of reasons why gold should be moving higher from the unprecedented printing of money by global central banks to the deficit spending and eventual fiscal day of reckoning facing most Western nations. I do not disagree with the gold bugs that in the long run gold prices will rally above the all time highs, but in the short to intermediate term there are several forces which have the potential to drive gold prices lower.
Gold prices cannot rise continually,regardless of the macro-economic backdrop. Nothing, not even Apple Computer (AAPL) or Priceline.com (PCLN) will rise forever. Eventually prices will come back down to earth and revert to the long term mean. It has happened in gold and it will happen to Apple Computer and Priceline.com at some point in the future, it is simply a matter of time.
Before I discuss my reasoning as to why gold and silver are likely to pullback in the intermediate term, I need to remind readers that I remain long-term bullish of precious metals. While the long-term remains bright, the short-term is especially murky and dark.
The first primary concern for gold bugs should be the price behavior of the U.S. Dollar Index recently. The Dollar has rallied sharply higher after carving out a higher low on the daily chart (bullish). The Dollar is on the verge of breaking out above a major descending trendline on the daily chart. Once that breakout to the upside has occurred it will become likely that the recent highs will be tested and possibly taken out. The daily chart of the Dollar Index is shown below.
Dollar Index Daily Chart
The U.S. Dollar's price action shown above is not indicative of bearish expectations. In fact, I would argue that the Dollar is, and likely will remain in a bull market in the short and intermediate time frames.