Precious-Metals Blowoff in Progress

This column was originally published on RealMoney on April 19 at 12:38 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I've been bullish on precious metals and commodities for some time, and still consider myself bullish in the long run, but if there isn't a gold and silver blowoff in progress, I'll eat my hat.

Let's go over a few of the things that bother me.

Gold Bugs Are Getting Too Popular

Who's more popular than the precious-metals crowd at the moment? Investment publications are running large, one-sided feature stories on gold (Time & Newsweek: Where are your cover stories on the subject? They must be coming soon). Owners of precious-metals Web sites are being quoted as analysts, when in reality they're cheerleaders with a one-sided interest (and perspective).

Most telling of all, some pretty outlandish predictions for gold's price objective are starting to be heard.

Is a price target of $850 an ounce, gold's 1980 high, reasonable in today's environment?

Heck, it feels like it might get there next week at this rate. I'll even listen to a well thought-out case for a long-term run to its inflation-adjusted high, which would be just north of $2,000 an ounce. But near-term predictions for $4,000 to $5,000, as I've been seeing lately?

I even saw one recent commentator quoted as saying gold would reach $20,000 an ounce by 2020 (with silver at $2000, by the way), only to be topped by another who suggested that $36,000 was not unrealistic! Ironically, just imagine the ridicule these same individuals would heap on a forecast for the Dow at 36,000.

Silver

Often referred to as the "poor man's gold" because it feels difficult to pay so much for just one ounce of gold when many ounces of silver can be had with less money, the white metal tends to move later than gold and has in the past marked the end of important precious-metals rallies when it surged violently. With that in mind, how can we ignore the technical condition of silver at the moment, as shown in the three-year chart below?

Three Year Extension Silver is parabolic here.

Source: Stockcharts.com

I don't care what the asset is, when a chart starts to look parabolic, I get nervous. And just look at the short-term momentum indicators pictured (RSI, MACD and stochastics, which I like to view together). Overbought would be the understatement of 2006. The last two times silver looked remotely like this on a technical basis -- in the spring of 2004 and again later that year -- it marked the beginning of meaningful precious-metals corrections.

And it's not just on a daily basis that silver looks to be in the midst of a blowoff. I know these charts are large, but the weekly and monthly charts going back to 1990 just have to be seen:

Weekly Chart Is Stretched Thin It's extended here too.

Source: Stockcharts.com

And as off-the-charts as the weekly momentum indicators are, the monthly gauges are similarly extended:

Monthly Chart Similarly Silly Doesn't get any better looking here.

Source: Stockcharts.com

Maybe this is a sustainable trend, but look again at the momentum indicators, especially compared to what they looked like at important peaks in the past. If you threw out the symbol and someone brought you this chart, would you rush to buy the stock it represented?

Central Banks

One gold-bug theme that interests me at the moment is the argument that central banks are buying metals, which is a bullish development. When did government officials and central bankers become so brilliant in the eyes of the government-wary precious-metals community?

Wasn't it Treasury Secretary G. William Miller who announced in January 1980 that the U.S. would no longer auction its gold, doing so literally days before the metal peaked near $850? And don't gold bugs unanimously ridicule central banks around the world for having engaged in their heaviest selling near gold's secular lows of $250 an ounce just five years ago?

Astonishingly, precious-metals permabulls now point to signs of central-bank buying as bullish support for their arguments. And two of the nations that have signaled most clearly their intentions to add to their gold holdings, Russia and Argentina, are both less than 10 years removed from defaults on their sovereign debt. But that's the past. Today they're geniuses.