Silver shot up again! Excited? And rightly so, because it’s a very important indication.
It’s not one that most investors think, though. At least not what those unfamiliar with the specifics of the precious metals think. In some cases, an increase in momentum is a bullish thing, as it shows that a given market is strong. This doesn’t have to be the case, and rallies are not inherently bullish, but many people believe that to be the case.
In the case of the white metal, it’s the opposite, and what I wrote about this mechanism previously remains up-to-date:
Moving to silver, those who have been following my analyses and/or the precious metals for some time, know that when silver soars relative to gold, it’s likely time to buckle up and prepare for a price drop. That’s simply what the silver market does.
The silver market is considerably smaller than the gold market and it’s more popular among individual investors (compared to the interest from institutions), which means that as investment public gets excited, it’s likely to push the silver market more than the gold market. And when does the investment public get particularly excited? That’s right – at the tops, or very close to them.
We saw that signal once again yesterday. No, it’s highly unlikely that this pattern was broken. It’s much more likely that the top that is being formed now is very significant, and thus, it’s being confirmed by more and more signals. Or one could say that one signal (silver’s short-term strength relative to gold) is much clearer.
While silver is considerably over its October high, gold is testing that high, and during yesterday’s session, the yellow metal reversed after touching that high.
What does it mean, given gold’s move above $2,000?
It means that the history is likely to rhyme, and gold’s breakout above this very round number is likely about to be invalidated. This, in turn, is likely to lead to bigger declines, just like it was the case when gold declined after previous invalidations of its attempts to break above $2,000. The gold forecast remains bearish.
And just as the gold chart features a small, unconfirmed breakout, we see the same thing on the GDXJ ETF chart.
Junior miners closed a bit above their rising resistance line, and the move was not confirmed.
The odds are that it won’t be confirmed and that we’ll see another decline, and it’s not just because of what we see in silver and gold.
One of the foundations of the technical analysis is that history tends to repeat itself to a considerable degree. This doesn’t change over time, regardless of the economic conditions, because this rule is rooted in the fact that people react in the same way to similar price/volume patterns. And they react with similar fear or greed – this doesn’t change over time.
If you look at the RSI indicator, you’ll notice that it’s currently at more or less the same level at which it topped in July. This is a moderately accurate indication of a decline on its own, but the bearishness increases dramatically when we consider what happened before both short-term rallies.
In both cases, the market was surprised by low CPI numbers. That triggered corrective rallies.
Now, since both rallies were triggered by a similar event, it’s quite likely that they would end somehow similarly. The analogous position of the RSI shows exactly that – those moves are analogous and… This means that the current move is likely over or about to be over.
Given the situation in gold and silver, as well as the attempt to break higher in gold and miners, it seems that we’re about to see a decline shortly.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief