Gold futures topped out at $1,432 on Dec. 7 and entered a major correction that's still in control more than six weeks later. Silver futures joined its more precious cousin, ending its historic rally three weeks ago at $31, and playing catch-up in a 5-point decline. Together, these overloved metals are causing a ton of sleepless nights and wave of second-guessing. Of course, corrective phases after strong rallies are perfectly natural, shaking out excessively positive sentiment ahead of renewed buying interest and continued uptrends. However, healthy corrections and trend changes look nearly identical in their early phases, raising fears that precious metals may have topped out and are headed into longer-term declines. As a trader and market analyst, it's my job to look at technical evidence without bias and come to logical conclusions about the future course of price direction. I'll attempt that task today with gold and silver, but I have to admit a major prejudice -- I own the iShares Silver Trust ETF ( SLV) in a long-term account, which places me squarely into the bulls' corner. But one fundamental aspect of the precious-metals rally and recent decline makes me nervous. A big chunk of the historic 2010 buying frenzy spiraled off massive liquidity being pumped into the markets by our friends at the Federal Reserve. The inflationary aspects of their often-criticized program, aka "QE2," are obvious and indisputable. It's common sense that Fed easing will last just as long as it takes for the U.S. economy to get back onto the fast track. I believe that long-awaited growth spurt will start this year, driven by higher-than-expected employment gains. This sudden growth is likely to put a damper on liquidity policies and force Bernanke and co. to starting thinking about the rate cycle once again. Rate increases don't need to take place in 2011 to hurt precious metals. Rather, any speculation that puts a date on the first increase will force everyone still playing the notorious "risk-on, risk-off" trade to reconsider their positioning. In turn, gold and silver will return to traditional pricing, in which they're valued through natural supply and demand, monthly inflation reports and macro-fear gauges. That transition might put a floor under gold and silver, but it won't have the salubrious impact of "QE2." In fact, I suspect this month's broad commodity selloff is closely aligned with institutions expecting higher 2011 growth rates and a return to normalized liquidity levels. In a word, they're quietly unwinding positions that depend on the final aftershocks of the 2008 credit collapse.
Let's get back to the technical outlook, which is easier to analyze because it relies on pure price action. In this regard, gold and silver are engaged in healthy weekly declines that are long overdue after their historic rallies. However, both downtrends might last longer than hopeful bulls expect and force many folks to question their love affairs with these volatile instruments.