October 19, 2020, 11:15 AM
Is silver just an industrial metal?
Not only an industrial metal, and not just any industrial metal. It served as money for centuries, much longer than the fiat currencies have been used. Its specific properties are also widely used in many industries (best conductor of heat and electricity), and perhaps the only more versatile commodity than silver is crude oil.
The first verse of the Correlation Matrix shows just how closely silver moves along with gold – the flagship monetary metal. The link is not particularly strong in the long run, but it is still strong enough despite that.
And what about the link with copper – which we’ll use as a proxy for the industrial metals?
There are times when silver and copper move in opposite directions. However, merely stating that they move in adverse directions for a few days is not particularly informative. It is just a very brief move that is being examined, and both moves could have been just random noise.
Just like the existence of snowballs doesn’t negate the fact that ice caps are melting at an accelerating rate, observing just a few days when silver and copper move in the opposite directions doesn’t mean that they will move in the opposite directions for longer.
Taking the last few years into account, there were periods when silver moved together with copper (recently) and periods when it moved in the opposite direction (in late 2016).
There were also times when both markets moved relatively independently from each other, and there were times when one market led the other. The latter would be quite informative if it wasn’t for the fact that sometimes silver leads copper, and sometimes it’s the other way around.
The bottom part of the above chart tells us that copper and silver are positively correlated for most of the time, but the link is far from being carved in stone.
So, what can the link between copper and silver tell us? Exactly what we wrote previously. Namely, silver is an industrial metal, but not only that. It’s also a monetary metal. In other words, silver has a dual nature.
What does the above mean from here on out? That its performance could be less than perfect if the general stock market slides, but it will most probably catch up with gold in a major way, once stocks finally bottom and start to climb once again.
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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
October 12, 2020, 9:48 AM
The stock market rebounded very nicely last week, and it even corrected more than 61.8% of the recent decline. Earlier this year, gold and stocks fell sharply together (in March) and then they both rallied back up to new highs. So, does this strength in stocks indicate upcoming strength in gold as well? Not necessarily.
Let’s start with examining the former.
The big news of the previous week was that the general stock market managed to move higher, despite the invalidation of the early-2020 high. This is something unusual for any market, as commonly invalidations of breakouts or breakouts are strong indications that the market is going to move in the opposite way. The invalidation of the breakout was therefore a strongly bearish sign.
So, what happened? Well, it could have been the case that the nothing-bad-will-happen-before-the-elections rule applied, and the rally was more orchestrated than natural. By that we mean that some powerful investors bought enough to trigger the rebound. And let’s keep in mind that the Fed pledged to play an active role right now – even more so than it did in 2008.
What does it mean going forward? It means that the slide could be delayed, but I don’t expect it to be averted entirely. After all, no market can be “triggered artificially”, “supported”, “set”, or “manipulated” for longer periods (of course, except the interest rates), and despite the massive money printing, the economy is not doing great. And that’s an obvious understatement.
From the technical point of view, we would like to point out three things:
- Stocks have corrected more than 61.8% of the recent decline, so they could move higher in the short term. That’s not something certain, though.
- In 2018 we saw a tiny invalidation of the breakout, then another move higher (slightly above the previous highs), and stocks plunged shortly thereafter.
- In early 2020, the very initial decline was relatively small, and it was followed by another move higher (slightly above the previous high). Stocks plunged shortly thereafter.
Consequently, in analogy to two most similar situations to the current one from the recent past, it wouldn’t be surprising to see stocks move to or even slightly above the previous highs, before they turn south in a spectacular way.
This could mean a delay in precious metals’ and miners’ decline as well. Again, a decline, not its absence. Especially that the situation continues to be excessive on the forex market.
How did gold respond to the sizable upswing in stocks?
Gold moved above the declining resistance line, but stopped at its 38.2% Fibonacci retracement. Let’s keep in mind that stocks erased more than 61.8% of the preceding decline. This means that the reaction in gold was much smaller – not something that we would expect in case of a market that’s supposedly about to “take off”.
So, even if the general stock market moves to or slightly above its previous 2020 highs, it doesn’t mean that the same would be likely for gold. The decline of the latter would likely be delayed in this case, though. If the general stock market fails to rally, but the USD Index does, the gold price would be likely to plunge.
Moreover, please note that the move above the declining resistance line was not significant, and thus it would require a confirmation. Gold closed last week practically right at the resistance line, so it’s not that clear if the breakout is anything more than a blip on the radar screen. In today’s pre-market trading gold moved a bit lower, but not yet enough to invalidate the breakout.
Overall, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Gold is not showing strength here, despite what one might think based on Friday’s upswing alone.
Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it’s likely to slide in the upcoming weeks and/or months. Even if it doesn’t happen right away.
Summing up, the stock market’s strength is far from being a proof that gold is about to decline. Conversely, the relatively small size of gold’s upswing compared to the one in stocks is yet another factor pointing to lower gold prices over the next several weeks (not necessarily days, though). Gold is likely to move to new highs, based on many fundamental reasons, but not without declining first, on technical grounds.
Thank you for reading our free analysis today. Please note that the following is just a small fraction of today’s (this week’s flagship) Gold & Silver Trading Alert. It includes multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
October 5, 2020, 4:04 PM
On Friday, we commented on the above gold chart in the following manner:
The short-term triangle-vertex-based reversals were quite useful in timing the final moments of the given short-term moves in the past few weeks. Please keep in mind that the early and late September lows developed when the support and resistance lines were crossed.
We can see the same thing happening once more. Based on the recent highs and lows, yesterday, the support and resistance lines both crossed again. And indeed, gold is trading below yesterday's closing price in today's pre-market trading.
Now, this technique might not work on a precise basis, but rather on a near-to basis, and given the highly political character of the current month (before the U.S. presidential elections), things might move in a somewhat chaotic manner... But still, this technique worked multiple times in the previous months and years, and it has worked recently as well. It seems quite likely that the days of this corrective upswing are numbered.
Indeed, gold moved lower in this week's pre-market trading. Therefore, what we've analyzed above remains valid, and the outlook continues to be bearish for the next several weeks - next few months.
Based on the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.
As far as the white metal is concerned, previously, we've indicated the following:
Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.
Once again, that's exactly what happened.
At this point one might ask how do we know if that really just a dead-cat bounce, and not a beginning of a new strong upleg in the precious metals sector. The reply would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very likely because of multiple factors, and the clearest of them are the confirmed breakdowns in gold and silver, and - most importantly - the confirmed breakout in the USD Index. The invalidation of the breakout above the previous 2020 highs in case of the general stock market is also a bearish factor, especially for mining stocks (and silver).
September 28, 2020, 1:53 PM
Available to premium subscribers only.
September 21, 2020, 1:53 PM
Welcome to this week's Gold Investment Update. So far, 2020 has been an incredible and challenging year for the many markets, and that does not exclude gold, arguably one of the most important and most valuable commodities in the world.
The yellow metal's price is influenced by a myriad of obvious and non-obvious short and long-term factors, such as the long-term turning point and its self-similar pattern. In recent months, we've already discussed the presence of gold's long-term turning point in broad detail. Furthermore, only a couple of weeks ago, we've learned about the powerful self-similarity pattern in gold, making sense of similarly shaped patterns in the marketplace over different periods.
In today's update, we'll discuss both, starting with the former. Let's take a look at gold's long-term chart.
We used the purple lines to mark the previous price moves that followed gold's long-term turning points, and we copied them to the current situation. We copied both the rallies and declines, which is why it seems that some moves would suggest that gold moves back in time - the point is to show how important the turning point is in general.
The big change here is that due to gold's big rally, we moved our downside target for it higher. Based on the information that we have available right now, it seems likely that gold will bottom close to the $1,700 level. That's very much in tune with how much gold moved after the previous long-term turning points.
Having said that, let's take a look at gold's short-term chart.
Gold is already after the breakdown below the rising red support line, which makes the short-term outlook bearish, especially that this breakdown was confirmed.
And what about the likely target? Please note that the if gold declines to the 61.8% Fibonacci retracement based on the most recent rally, it would also decline - approximately - to the April - June lows... Making this support very strong. And - guess what - this price target is in tune with what we already wrote above based on the long-term turning point's consequences.
Moreover, that's not the most important thing about the above chart. The most important thing about this chart starts with the reply to one important question:
Do you get the feeling that you have already seen gold perform this way before?
Because you did.
The history rhymes, but this time, the similarity is quite shocking.
We copied the short-term chart and pasted it on the long-term chart above and next to the 2011 top. We pasted it twice, so that you can easily compare gold's performance in both cases in terms of both: price and time.
They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn't matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.
After a sharp rally, gold declined quickly. Then we saw a rebound, and a move back to the previous low. Then, after a bit longer time, gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That's what happened when gold topped in 2011 (and in the following years), and that's what happened also this year. Ok, after the initial decline from the 2011 top, we saw two initial reactive rallies and in 2020 there was just one, but it didn't change the similarity with regard to time.
The patterns of this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.
What is likely to follow based on this pattern, is that we're likely to see the end of the slower decline, which will be followed by a big and sharp decline - similarly to what we saw in 2013.
How low could gold slide based on this similarity? Back in 2013, gold declined approximately to the 61.8% Fibonacci retracement based on the preceding rally (the one that started in 2008), so that's the natural target also this time.
And we already wrote about this particular retracement - it's approximately at the $1,700 level. This has been our downside target for weeks, and it was just confirmed by this precise self-similar technique.
Another interesting point is that gold made an interim low close to the 50% retracement and the previous lows. Applying this to the current situation suggests that we could see a smaller rebound when gold moves to about $1,760 - $1,800.
The interim downside target has very important trading implications. Even though gold's rebound might just be temporal, something much more profound is likely to take place in case of mining stocks and silver. You will find more details in today's flagship Gold & Silver Trading Alert. Subscribe now and read today's issue right away.