Are Gold And Silver Getting Interesting?

by: Tom Luongo

Gold and silver exploded on North Korea news - or did they?

Rotation into U.S. 'hard' assets is beginning.

Gold and silver technically are close to strong upside moves.

Gold (GLD) and silver (SLV) put in powerful moves this week on safe haven buying because of U.S. saber-rattling with North Korea. At least that’s what the headlines are trying to tell you.

But, is there something else at play here? Despite the VIX (VXX) being crushed to record lows, there is real chaos in the world that is beginning to make itself felt away from the equity markets.

Most analysts see the stock market pushing relentlessly higher as a sign of a bubble. But, that’s hard for me to agree with when there are real geopolitical events occurring that signal people are more worried about the return of their money rather than the return on it.

It is during times like these that gold and silver thrive. But, in 2017 we have to now go one step further. We have to factor in cryptocurrencies like Bitcoin (OTCQX:GBTC) and Ethereum as safe-haven assets as well.

And when you do that, as well as see commodities like copper (CPER) pushing to multi-year highs, oil (USO) defying supply and demand fundamentals to levitate near $50 per barrel despite softness in the Suezmax and product tanker market (see CPLP’s earnings call for a taste of reality in oil), you have to begin wondering if a dangerous shift in sentiment is unfolding.

This shift in sentiment is one where investors begin to eschew exposure to debt and look for claims on hard assets. Like cryptocurrencies or hate them, they have no debt associated with them, and in this market that makes them a hard asset.

German 10-year bunds closed July at 0.533%, an 18-month high and well above formidable resistance at 0.5% that’s been in effect since Donald Trump won the U.S. presidency in November.

German / U.S. Spreads are tightening Moreover, the spread between German and U.S 10-year debt has narrowed considerably this year, reflecting a clear preference for U.S. debt even in the face of the Federal Reserve raising interest rates and being on the verge of ending its reinvestment program of U.S. government securities.

This is the face of an emerging safe-haven trade. Because U.S. debt is needed in a liquidity crisis to convert into dollars. This is why the Fed can’t get the long end of the yield curve to rise no matter how much they try to jawbone it.

There is too much of a synthetic short against the dollar that needs to be continually hedged in the event of a crisis. It’s also why, despite ECB jawboning, core EU bond yields continue to grind slowly higher. Even the short-end of the German yield curve is being dragged higher, despite ECB President Mario Draghi’s assurance that its asset purchase programs are not ending any time soon.

Why Gold?

When I see both silver and gold break significantly higher, through resistance, against a day where the dollar is strong, my ears perk up.

Gold pushed through the July high today on very mild news and market moves. Stocks off 0.3% to 0.4% and bond yields down 2 basis points are not good reasons for at $0.45 move in silver and a $25 move in gold .

That has not been normal trading behavior in either metal in a long time. And, so, while I’m still convinced that both metals have not put in their final bottoms for the six-year bear market, I’m beginning to wonder if we’re going to see a push up towards the post-Brexit high of $1377 before things unravel versus just meekly bouncing along below $1300.

I’m putting up the weekly chart of gold to show you what I’m talking about. Last week’s high at $1280.30 was broken even though we had a high probability setup for weakness in gold this week. At the open of $1264.40, 86.5% to be precise, versus a 48.6% probability of a break to the upside.

This week, we’ve gotten both. And that’s an 11.1% chance (N=252 weeks). This is painting a picture of an important week in the gold market, especially if gold closes above $1280.30.

That would signal a move next week to attack $1300 again. Gold entered August with near certainty of breaking above the July high. It happened within the first week. And that gives it much higher odds of breaking $1300 on a strong close this week.

Silver Confirmation

Silver’s price action has mirrored gold’s but because its chart is more bearish both on the weekly and monthly level the probabilities of a significant breakout to the upside are far lower.

Again, like gold, silver has a high probability setup of a move above the July high. That it did so by erasing a $0.75 move down off the August open in two trading days this week should give you pause. But, the fact is that for silver to rally and put in a two-bar monthly reversal it will have to close above the June high of $17.82.

There is just a 36.7% probability of that happening. That said, upside and downside breaks for silver are incredibly strong signals. Engulfing monthly bars (bars where both the previous high and low are violated) happen once every three years (3.3% of the time). So, with the break to the upside, silver’s very likely not collapsing below $15 this month.

These are the things we are looking for in the gold and silver markets this month. And if they occur against the U.S. dollar putting in some form of definitive bottom and move higher, then that would be a big tell that we’re in for a very volatile September and October and the potential for bond market illiquidity to rise.

I’m watching for this convergence of U.S. assets – stocks, currency and precious metals – to begin moving in concert with the major cryptocurrencies at the expense of sovereign debt. It’s already occurring in fits and starts but it hasn’t made it into the consciousness of the market. When it does, sentiment will shift quickly and the central banks may not be able to react fast enough.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own some gold and silver, a few guitars and too many goats.