Cautionary Levels For Precious Metals

The question we posed was whether or not this base breakout would follow through higher or fail. Notice how Tuesday's Mystery Chart had a much different look than the updated chart below.

Prices had just retested their 2016 highs near 17 and looked vulnerable of breaking back below this key level.

Fast forward a few days and the market has spoken with SLVP up an additional 5% on the heels of another big week for Silver.

This chart looks great when viewed alone. As long as we're above 16.60 we think prices eventually head towards our next objective at 23. Although, we're seeing a number of other things that make us think it won't be as smooth of a ride getting there as it's been for metals and the miners over the past few months.

Here are Silver's Gold Mining peers $GDX. Gold took off long before Silver and so did the miners. After a nice move out of a multi-year base, GDX just hit our first price objective, marking a logical level for some consolidation to take place.

In October of last year, despite believing the primary trend would eventually continue higher, we warned that the near-term risk in Gold was to the downside if GDX was below 31.50.

"This could take months. I’m in no rush," JC said in the post.

It ended up taking about half a year for Gold Miners to work through the overhead supply at this level, and you would've had to endure a near 50% drawdown from February to March before prices eventually reclaimed their highs and broke out. In other words, it was no smooth sailing for anyone who rode these trends out.

Starting in the fall of 2019, Gold was also a hot mess as it chopped around its 2011 and 2012 lows ~1,550. It wasn't until April of this year that both Gold and GDX finally made sustained moves above their resistance levels.

It then took another four months before Gold finally resolved above its former highs just recently. These things take time.

When we look at Silver today we're seeing a very similar picture as we did in Gold back then. Following an explosive 50% rally in just a few weeks, some consolidation would be healthy right now... and again, we're at a logical place for it to occur.

Just like Gold last year, Silver has now run right back into it's 2011 and 2012 lows around 27. And also just like Gold, there exists some serious overhead supply above this level.

While we remain bullish over the long-run, if you've been long Silver we think it makes sense to take some profits and see how prices react here. From a momentum or rate of change perspective, the recent move in Silver ranks among one of the most extreme of all-time.

The Silver Miners ETF SLVP is also approaching its 2012 lows which are right around the same level as those 2016 highs near 17, shown in the first chart above. We don't want to be putting our foot on the gas here.

The Silver Miners vs Silver ratio is also rolling over at key prior highs.

We always like to look at the miners relative to the metal itself as a gauge of risk-appetite for the space. Recently, Silver has been moving higher at a much faster pace than the miners. We want to see the opposite occur to support these higher prices.

The Gold Miners to Gold ratio is also failing at key former highs near 0.24.

If and when these ratios break out of their bases it will give us valuable information that the animal spirits are really alive and well among Gold and Silver bugs. But it hasn't happened yet so we'll have to be patient.

The fact that all of these charts are running into logical areas of resistance at the same time, especially Silver approaching the same levels where Gold struggled, is enough to make us cautious.

Luckily, we have the chart of Gold, which is already back at all-time highs, to use as a roadmap for how Silver might get there.

The bottom line is that there is a lot of supply for Silver to absorb at current levels. This was no walk in the park for Gold or Gold Miners when they visited equivalent levels around this time last year. They eventually resolved higher and we expect Silver will too, but it could take some time. With that said, as we're entering later stages of the bull cycle for Precious Metals and Silver is the higher beta play, we would expect it to cut through this resistance zone faster than Gold did. We will address that if and when the time comes.

For now, when we take all of these things together, the weight of the evidence tells us this is a logical place for Precious Metals as a whole to take a breather and digest some of their recent gains.

Thanks for reading and please let us know if you have any questions!

Allstarcharts Team