What has changed to cause the gold and silver breakout?

The prices of silver and gold have been soaring for weeks. Yesterday afternoon, gold closed at $1901.95 on a cash-basis above $1900. This is just $18 below the September 2011 all-time record of $1920.

For two years silver has been famously far behind gold. But on Monday, it broke through $21.13 post-Brexit vote low (again cash basis) and then never looked back. It exploded to $23.77 to close the week at $22.77 an troy ounce.

My inbox starts displaying calls indicating that the weekly prints aren’t yet complete. Because these indicators, such as Bollinger band and 200 day moving averages are about mean reversion strategies, it’s easy to make this a breakout position.

Markets always return to the mean, and that is true. However, they can remain irrational longer than your ability to keep them solvent. The reason this is so true is because central banks across the world inject trillions into markets in an effort to prevent them collapsing.

Fundamentals and statistical regressions from the past are not used to trade in markets.

Forward-looking markets exist.

They are driven by momentum and sentiment.

Instead of trying to make a superficial technical analysis on how silver is currently X% higher than its 200dma which would indicate it’s too expensive, ask yourself, “What is the hell are we doing here?”

It seems that there are many variables that all work together to answer this question.

This is why I am focusing my attention on the first. Because of the change in the fiscal and political structure of Europe, the U.S. dollar Index (USDX) collapsed this week. Since the market bought into the reflation trade that followed the release of COVID-19, the USDX has been sinking towards recent lows.

Gradually all the money that had been stuffed into the bank’s hands and the funds of hedge fund managers, Blackrock (the U.S. treasurer’s agent) bid assets prices higher.

U.S. stock yields are historic lows while stocks have reached historic heights. The price of gold is currently at $20 below its historical high. Why did the USDX drop to such low levels?

Why is the U.S.dollar the only item that was on sale?

The success of the European budget and the COVID-19 summit in crisis, which was a huge boost to the euro’s value, were largely responsible for the rapid rise.

Because currency traders have now bet on the house, or are signalling that they do, the European Union has now been made a political and fiscal entity. This is because the European Commission directly controls both spending and taxing authority.

This is what markets have been trying to punish the euro for over the years. The process now has started.

After capital fled from the U.S. for short periods to alleviate European bank solvency worries, the euro crashed through its March high. It then rushed straight back in the midst of crisis.

Take a look at the weekly Euro chart and you will see that markets are prone to extreme volatility (a shaded area of high volatility).

This chart shows clearly that the Euro’s March low was notable and that it is important to have a new closing high every week, regardless of how far off it is from its historical mean.

Up until last week, I was not convinced in the strength of the euro’s rally (orange line in chart). It was not convincing enough to persuade traders that the euro would be able to rally over the weekend, regardless of how it performed compared to the long-term.

The reason this is significant for gold is because gold has been caught between two opposing forces nearly one year.

The safe haven market is on the one side, and it’s in sync with the strong dollar.

Reflation trading, which relies upon the generosity of central banks to create liquidity and market sentiment, is another option. The dollar would fall alongside gold, as traders profited from the ‘happy times are back again’ trade.

Gold was steadily rising regardless of dollar. That indicated that sentiment was changing. But gold was caught between the two trades generally, from day to day, and week-to-week.

However, the March spasm altered that dynamic. The dollar markets became tepid and everyone went into “sell everything but dollars” mode. These are the days gold gets most hit and in general that is when there are some of the strongest downdrafts.

However, the overall price of gold is moving up as bulls continue to back it at higher levels. After gold reached $1375, the post-Brexit high, the bull market officially began. This was after it broke out of the six-year-old consolidation pattern seen on the quarterly chart.

Closing prices are important. Everyone was told by June’s strong closing in gold that something fundamentally had changed. The Q1 bar is an example. You can see that it ended above the Q3 2019, despite markets locking-up in early March.

It’s an extremely powerful signal. This signal was more than enough to set the tone for the four month run. Due to the massive move in Q2 Gold, it should have been sold into the close of profit taking and booksquaring.

However, it did not. It was actually the shorts that were killed.

That means that for the moment, there is no dynamic between USDX and gold. Now, gold is trading independent of any other currencies including the dollar.

Although moving averages are not able to catch market potential, they can read candlesticks. It is easier to predict the relation between two bars, and then relate those changes over time.

Everything I have just mentioned in relation to gold’s quarterly performance was setup at critical moments in time in both the monthly and weekly charts. My Patrons benefit greatly from these video market reports, which I produce twice weekly.

Statisticians are less important than time and prices. Statistic can’t give you an indication of the probability that your investment will go higher or lower. For the month July is gold too expensive?


MetricAverageJulyDifference Between Closes$62.90$118.06Range: Low to High$79.47$123.59N = 254 months of data (Source: Investing.com)

It’s possible that the remaining July state gold will hit $1920 as the all-time record and return to its home for just a few more weeks. This has been an excellent run. However, that September 2011 record is historical and should be respected both by bulls as well as bears.

That’s not the hard call. But what’s even more important is the month in which gold finishes. That sets up August’s probability.

It is possible that gold will close July exactly where it has closed the week before, at $1901.15, as opposed to $1906.68 high and $1757.71 low. If gold does so then there are 90% chances of gold surpassing July’s record and only 1.2% chance of gold reaching July’s lowest.

There is an excellent possibility that august will break the July record, given the fact that on average gold trades $80 each month, and that $63 is the difference between closing price, there are good chances that it will.

Those are your odds. These numbers can’t be disputed. Even though the gold is frothy, it’s a good play to own long. Gold should be bought until there is some sort of weekly close to alter that picture.

Naturally, this is the level where I expect the signal to appear. It could be this week’s last week of July. This will push the price down and shift the odds in August. The history of silver and gold has been to be crushed to the quarterly and monthly closings to preserve momentum.

Silver’s current position is interesting, as it’s now 2 years behind gold on the big picture (quarterly charts breakout), and hasn’t had any chance to run prior to people calling for silver’s collapse.

This week silver beat its post-Brexit record of $21.25 an troy ounce. This was due to the huge weekly closes, which drove through near-term resistance higher than $18.00. Massive follow-through buying was rewarded with a $19.32 close last week, pushing the price past what should’ve been stronger resistance of $20. It didn’t really matter.

The chart’s shaded areas are highlighted. It is a consolidation of seven years below $21/ounce. The July close at or above the level in July would signal that the market is moving to $26 (the area where support was after 2011’s peak; see chart).

Silver is trading at a level that’s far beyond normal. But, after the strong June close, there was a 9.5 to 1 chance that silver would surpass the Q2 low in Q3 and utilize that energy as fuel to push for the Q1 and the 2016 highs. These are just a few of the many indicators that silver is incredibly bullish and there was a lot of demand.

Silver lags gold year-over-year, so gold and stocks could both go bust before they do. That’s actually my medium-term view.

Since silver is not as valuable as gold, nor is it an asset that can be used to secure your wealth like other monetary metals. This could mean that the strategic metals complex is shifting, and this should alarm all of the CNBC recovery punters.

Subscribe to my Patreon for help in tying headlines to markets and clear analysis that doesn’t use jargon.

Use the Brave Browser in order to disable tracking by Facebook and Google wherever you are.

Please share this

This is how it looks: