Silver Joins the Miners in Leading Gold Higher
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Silver has a long history as being one of the most volatile metals when the price starts moving quickly on the up, or the downside. The potential for significant percentage gains causes speculators to flock to this tiny sector once major up-legs have begun.
But for the past eight years, silver has seen innumerable frustrated investors flee this highly speculative and volatile complex, vowing never to return. The entrance of high-risk, high reward competition in both the cryptocurrency and cannabis sectors have made the space even less attractive, assisting in speculation capital invested in all things silver being dead money for years.
Throughout history, both gold and silver have served as currency, however, gold has more recently been acting as the ultimate reserve currency, while silver has been trading like an industrial commodity. Because of this, silver has languished in a brutal eight-year bear market since peaking near $50 per ounce in April of 2011, whereas gold has been acting as a more recent safe-haven.
But with global growth slowing recently, central bankers around the world have taken a more dovish turn toward monetary stimulus, which has weakened their local currencies. The Fed is the most recent and largest central bank to telegraph lower interest rates, along with a weaker dollar. If gold continues to make progress on the upside, I expect the market to consider history and silver’s role as a precious metal, a store of value, and an inflation hedge.
With the gold price beginning to break out of its month-long consolidation of recent gains this week, silver has finally shown signs of this starting to take place. The white precious metal has quickly begun to outpace gold sharply. In fact, silver has suddenly joined bullion in its own quest of breaking out above long-term resistance, with a nearly 7% move higher since Monday.
Historically, it is not uncommon for silver to lag gold, once the yellow metal has made a technical breakout. In fact, when this current secular bull market in gold began in early 2001, silver did not begin its major up-leg until late 2003, however, silver equities began moving up with gold and its miners in 2001.
After a record run to over $1900 in a decade, a nearly 50% correction into the second week of 2016 saw the gold price make a significant low at $1050. Meanwhile, silver continued to be pressured and was trading closer to its lows made with gold in 2016 until this week, when it suddenly traded up to a 52-week high. If silver is able to make a monthly close above $17.50 on this move, the metal will technically join gold in a new bull market much like it did nearly three years after gold in late 2003.
Moreover, silver equities have made a sudden surprise move upward since Tuesday, telegraphing the probability of a near-term breakout in the white precious metal. Global X Silver Miner ETF (SIL) has soared nearly 11% this week with rising volume, while trading at its 52-week high and nearing a potential upside breakout. With gold remaining well bid above $1400, the recent surge into silver is being driven by investors taking advantage of its cheaper price, along with the expectation of rising inflation due to lower global interest rates.
Another bullish factor in position to assist silver in its launch into a new bull market lies in the metal’s most recent Commitments of Traders (CoT) report released last Friday. The silver CoT remains bullish and improved to 38% from 37% this past week. The large speculators slipped to 58% from 59%, so there is plenty of room for more spec longs to pile in if shorts continue to be squeezed. The latest silver CoT report will be released at 3:30pm EST this afternoon, which will contain futures positioning up until this past Tuesday, when this move in silver began to accelerate to the upside.
Although the price of gold has risen faster than silver since the end of May, we have most likely seen a peak in the gold/silver ratio late last month at 96. The last week of June has marked only the third time in modern monetary history this closely watched metric has risen above 90.
The 2008 financial crisis was largely responsible for the last time we saw this extreme anomaly between gold and silver peak at 96. Once silver began to quickly mean revert from its depths reached in October, the “poor man’s gold” began a parabolic run from $8.40, to nearly $50 by April 2011. The ratio has already sunk down to 88 by Thursday’s close, which could be the beginning of silver swiftly mean reverting ala 2008 – 2011.
While the $1375 level had been gold’s unmovable line of defense for nearly six years, silver’s 50-month moving average continues to be its Maginot Line, which is currently just over $16.20, where the metal closed on Thursday. This price point is not only the metal’s 2019 peak, but it also coincides with its 50-month moving average, the aforementioned line not closed above since early 2013.
According to the CME’s FedWatch tool, there is a 100% probability that there will be a rate cut announced at the FOMC meeting. The tool indicates there is a 59% probability that the rate cut will be 50-basis points (1/2%), and a 41% probability that the rate cut announced will be 25-basis points (1/4%).
As I type this missive, the price of August Gold is breaking out higher from its recent consolidation and could be headed towards the $1500 - $1550 region into the FOMC meeting at the end of the month. $1550 is where the metal broke down sharply in early 2013, so there is not much technical resistance until this level. With the market continuing to favor a 50-basis point cut in rates on July 31st, the GDX has broken out ahead of gold towards its 2016 high at $31, while silver is now leading the yellow metal.
Lower global interest rates and weaker currencies are pushing investor funds into gold and most recently, silver, which is sowing the seeds of a new bull market. Now that both silver and precious metal stocks are leading the gold price, together with a sharp decline in the gold/silver ratio this week from an historic extreme, we have further confirmation of a new bull market in precious metals taking shape.
Furthermore, the higher risk juniors have begun to catch up to the miners and royalty firms. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/