Contributed Commentaries
Silver technically joins gold in a new bull market
Kitco Commentaries | Opinions, Ideas and Markets Talk
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(Kitco News) - With December Gold continuing to consolidate recent gains above $1500, investors have begun to move quickly into the cheaper safe-haven option of silver which has surged 12% this month and touched an over two-year high of $18.76 on Thursday. Unless there is a harsh selloff later today below $17.50 in “poor man’s gold”, the metal that most everyone has loved to hate since it broke down sharply in 2013 will technically join gold in a new bull market. If history is any guide, leadership and its outperformance in relation to the gold price should continue in silver for the precious metals rally to keep running.
Historically, the gold trend in either direction has driven the silver market. Investors typically ignore this tiny sector until gold has rallied long and high enough to convince them its upside momentum is sustainable. 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.
We witnessed roughly the same significant bottom timing differential between gold and silver after the yellow metal made a major low in early 2016. Once the first leg of this secular bull market in gold peaked in late 2011, the safe-haven metal made a significant bottom in early 2016, while the silver bear market continued to frustrate investors by selling down to a final double bottom low in late 2018.
Meanwhile, silver equities also made a significant low with gold stocks in 2001, and again in 2016. Although silver equities have lagged the gold miners up until recently, both the silver global miner ETF (SIL) and the gold miner ETF (GDX) made a significant bottom simultaneously in early 2016.
Since the price of silver peaked at nearly $50 per ounce in early 2011, this precious metal with a strong industrial component has continued to lag the gold price until the closely followed gold/silver ratio peaked above 96 on a weekly basis early last month. Once the gold price broke out of a 6-year basing pattern in late June, silver began to wake up from its 8-year slumber. The ratio of gold to silver prices has fallen 13 percent since early July and even though gold has risen sharply during that period, the grey metal has risen faster.
The gold/silver ratio at 96 meant it briefly took 96 ounces of silver to purchase one ounce of gold. This lofty region above 90 in the closely followed statistic had not been seen since the financial crisis over a decade ago, which also signaled a major bottom in gold’s cheaper safe-haven alternative at $8.40 per ounce. Once silver began a sling-shot move in the opposite direction from this depressed low in October of 2008, the volatile metal ran to nearly $50 per ounce in just 30 months for a nearly 500% gain by March of 2011.
Silver leading gold higher is a sign of a healthy precious metal bull market and it appears as though the gold/silver ratio made another historical high last month. In fact, I wrote about this ratio possibly peaking above 90 last month in this column, as the silver miners began to lead the entire gold complex higher before silver had decided to join the party.
After pausing to consolidate for a few weeks, the gold/silver ratio has begun to sink even faster this week. With the never-ending trade war between the U.S. and China, along with civil unrest in Hong Kong, Brexit fears, and global central banks continuing down the path of destroying their respective currencies, gold and silver should remain well bid. There is now more than $17 trillion in negative-yielding global debt, up from $15 trillion just a few short weeks ago.
Moreover, the ECB already owns 40% of all Eurozone public debt with no end in sight and have destroyed their bond market, while the U.S. yield curve inverted further this week. The increased global destruction of currencies has been the main catalyst behind the recent surge in precious metals and if the Federal Reserve continues in their attempt to hold up the rest of the world by lowering rates further in the United States, they will eventually destroy the U.S. bond market.
However, I had been expecting GDX to possibly reach the $31 region along with $1550 in December Gold before a sustained correction and the market is flashing signals we may have reached a short-term top after touching both of these levels in the gold complex this week. On Wednesday, the precious metals sector showed signs of getting a bit ahead of itself before both gold and silver made an intra-day reversal to the downside yesterday. The sell-off was pre-empted at the open, when the GDX began to see some profit taking from strong resistance at the $31 region on Wednesday and continued yesterday with light volume.
Although we may see an extended correction begin to take shape after the Labor Day weekend, a pullback should be a nice buying opportunity. There is good support at the $1500 region in December Gold and I expect the $17.50 level in silver futures to hold on a weekly closing basis if selling continues next month.
Nevertheless, the buying opportunity may not last long, as I also expect to see the silver mean reversion to gold continue picking up speed once a technical correction in the precious metal complex has completed. The metal could move quickly towards its 2016 high above $21 heading into the next FOMC meeting on September 17-18, once a healthy correction takes place.
Despite the recent weakness in the complex, the fundamentals should still be supportive enough to limit losses in any technical-based sell-off. Both the technical and macro-economic situations are supportive of the entire gold and silver complex over the long-term and should continue to produce a series of higher lows and higher highs into 2020.
At some point in the near-future, we will see the juniors begin to outperform the GDX in a big way once speculative fever hits the entire precious metals complex. Over the past few years, I have positioned Junior Miner Junky subscribers in the best in breed precious metal juniors well ahead of this latest surge higher in both gold and silver. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.
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