Gold and Silver Will Rule in 2012

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NEW YORK (RealMoney) -- Gold and silver bulls need to lower their expectations and stand aside, because these futures contracts are setting up for lower prices in the first quarter of 2012. But those declines should eventually come to an end and offer excellent buying opportunities ahead of renewed uptrends that might last another three to five years.

Gold downside in the next few months should be manageable for positions opened in the past two years, with the yellow metal unlikely to break support between $1,400 and $1,500. However, silver remains stuck in broken-bubble mode following a parabolic thrust to $50 earlier this year; it could easily fall another 35% to 40% before turning higher and resuming its uptrend.

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Precious-metals mining stocks have underperformed their physical and futures counterparts since 2010 and should continue to do so in 2012. As a result, I would avoid the group entirely when the buying opportunity finally comes, sticking with direct exposure (outright or through fund proxies) and saving equity capital for other stocks and sectors.

Gold hit the psychological $1,000 level (blue line) for the first time in March 2008, reversing gears immediately and selling off through $700. It returned to resistance in 2009, completing a picture-perfect cup-and-handle pattern followed by a powerful breakout in October of that year. The contract then entered a channel-bound uptrend that went parabolic in July of this year.

The vertical buying spike above $1,900 marked the rally's end, yielding a sharp reversal down to the 50-week exponential moving average followed by a choppy bounce that stalled in early November. Note how last month's turnaround took place right at the channel top that was broken to the upside during the final buying wave of the long uptrend.

This upper channel line was tested on Aug. 26, just after the first buying impulse above $1,900. The support level held, yielding a secondary thrust that also failed, carving out a small double-top pattern on the daily chart. The breakdown through the trend line on Sept. 26, followed by a failed bounce, now exposes the downtrend to a decline that tests channel support near $1,560.