In line with predictions, gold is ceasing to benefit from war-fueled uncertainty. Meanwhile, silver faked another breakout. Could it be more bearish?
Reversal In Gold
Last week’s powerful, huge-volume reversal in gold was likely to be followed by declines. It was – but that’s just the beginning.
Yesterday’s $24 decline might seem significant on a day-to-day basis, but compared to last week’s enormous reversal, it’s really tiny.
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The modest extent of yesterday’s decline is by no means bullish – my emphasis on the small size of the decline so far should be viewed as an indication that much more is likely on the horizon. Besides, gold was down by about $20 in today’s pre-market trading.
As I wrote yesterday, gold’s breakout above $2,000 was officially invalidated, and given the weekly reversal, it seems that the war-uncertainty-based rally is over.
The decisive move below 70 in the RSI indicator after it was trading above 70 clearly confirms that the top is already behind us. Just like it was in 2020 and 2021 when similar things happened, history appears to have rhymed.
On Friday, I wrote the following:
Gold’s move of $0.40 (yes, forty cents) above $2,000 is not important as the breakout above this level was just invalidated the previous day. Technically, this is another attempt to break above this level, which is likely to be invalidated based on what we see in today’s pre-market trading.
The fact that I would like to emphasize today is that this kind of small rebound after the initial slide is common and perfectly normal for gold. We saw exactly the same thing right after gold’s 2020 top and after its 2021 top, and also two more times in 2021 (as marked on the above chart).
This means that yesterday’s upswing is not particularly bullish. It’s a normal post-top reaction. Lower gold values are to be expected.
Silver Declines
Silver declined yesterday, and it closed the day below its late-2021 high.
In other words, the breakout above this level was invalidated. This is a strong bearish confirmation from the white metal.
The white metal just invalidated the move above its 61.8% Fibonacci retracement.
That’s bearish on its own, but let’s keep in mind that it happened right after silver outperformed gold.
Last Tuesday, the GDXJ ETF was up by less than 1%, gold was up by 2.37%, and silver was up by 4.57%. Silver’s outperformance and miners’ underperformance is what we tend to see right at the tops. That’s exactly what it was – a top. Silver declined profoundly, and the attempt to break above its 61.8% Fibonacci retracement level will soon be just a distant (in terms of price) memory.
On a medium-term basis, silver was simply weak relative to gold, but we saw short-term outperformance. In short, that was and continues to be bearish.
As far as silver’s big picture is concerned, please note that it also provides us with a confirmation of the analogy between 2012 and now.
At the turn of the year in 2011/2012, there was a cyclical turning point in silver, and we saw a sizable decline in silver shortly thereafter. The same happened in 2021, after silver’s cyclical turning point.
Back in 2012, silver declined more or less to its previous lows and then rallied back up, but it didn’t reach its previous top. It more or less rallied to its 50-week moving average and then by about the same amount before topping.
Recently, we saw exactly the same thing. After the initial decline, silver bottomed close to its previous lows, and most recently it rallied to its 50-week moving average and then by about the same amount before topping – below the previous high.
Thus, the situation is just like what it was during the 2012 top in all three key components of the precious metals sector: gold, silver, and mining stocks.
We have a situation in the general stock market that points to an even quicker slide than what we saw in 2012-2013. If stocks slide sharply and significantly just like in 2008, then the same fate may await the precious metals sector – just like in 2008. In this case, silver and mining stocks (in particular, junior mining stocks) would be likely to fall in a spectacular manner.
All the above was confirmed by silver’s invalidation of its breakout above the late-2021 high. Not only has the medium-term outlook been bearish, but now the short-term outlook for silver is bearish too.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
