Silver Short Squeeze Unable to Ignite the Gold Sector...Yet
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
In the early hours on Wednesday, I alerted readers to a short squeeze which was beginning to take place in the silver market. Silver rallies are typically an inflation play, so the shorts began to cover when the CRB Index began to rally towards its January high. However, while silver has risen nearly 4% this week, it has yet to ignite the gold sector which stalled yet again near strong resistance at $1365 and sold off $15 into the COMEX close on Thursday. As I have written in a previous missive, gold must close above $1,365 for a long-awaited breakout.
Since the nearly 3% gain in silver took place on Wednesday, we will be unable to determine how many short contract positions are being covered by speculators into next Tuesday, until April 27th. The Commitment of Traders reports (CoT) are released each Friday but only show data through the previous Tuesday. The speculator short covering paused at the $17.20 area yesterday and the market may soon begin to lean on the confluence of resistance around the $17.50 region. This level represents resistance from multiple technical sources, including the 90 and 120 week moving averages, the weekly trend from July of 2016, and the daily trend dating back to April of last year. A close above $17.50 should spook the speculative shorts even more, further fueling the rally and targeting long-term resistance at $18.50.
Meanwhile, the miners have also been unable to benefit from the bullish situation in the silver space with the GDX rally stalling at the $23 resistance region. The miners are close to being short-term over-bought on a daily basis, so a bit of consolidation around this level would be healthy. We still need a solid close above the $25 level in the major miner ETF for confirmation of a breakout in the miners.
Although the continued failure of gold breaking out is further frustrating the long suffering precious metal bulls, silver is beginning to lead gold, bringing down the gold/silver ratio from 82 to 78 and it should continue to fall. Silver out-performing gold is a sign of a healthy bull market based on long-term economic fundamentals including rising inflation. Although gold stocks have already been leading the price of gold since the global equity panic ended on February 9th, silver out-performing gold has been a missing ingredient for an imminent breakout in gold stocks.
Furthermore, this weekâ€™s surge in commodities has been attracting the attention of market timers, as rising commodity prices are a leading indicator of inflation. The Bloomberg Commodity Index ($BCOM) is near an upside breakout and is testing overhead resistance at its January high. Although the CRB Index has already reached a two-year high, a close above its January peak would put it at the highest level in more than two years. This index began a new uptrend from a major bottom at the same time the GDX began a massive six month up-leg from its major bottom in early January of 2016. Crude oil, which is also an inflation gauge, has already reached a three-year high this week.
Since the end of 2017, U.S. dollar weakness has been the biggest driver of strength in gold and continues to work off an oversold condition by trading sideways for the past three months. While the gold price is trading sideways and building strength for what appears to be an imminent breakout, the worlds reserve currency has been creating what appears to be a bearish flagging pattern on the Cash Settle Index at the same time. The U.S. dollar low of March 30th at 88.53 should be monitored closely and violating this level could spark a gold sector rally and a subsequent breakout.
All the precious metals need is a catalyst to spur a sizeable rally. With silver and the miners now leading the gold price, combined with the near-term possibility of either a US dollar breakdown, and/or a commodities breakout, the second leg of this new precious metal miner bull market may be close at hand. If you require assistance in choosing the best quality junior resource stocks to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/