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Precious metals and most other commodities have been crushed since Jerome Powell made it clear that further rate hikes were coming. Markets and traders have just been warned of this fact with CPI inflation in August. An aggressive Fed with more rate hikes is coming.
It also means that the reserve currency has been strong. The strength of the US dollar weighed on many assets. Especially on gold and silver, gold being negatively correlated with the US dollar.
Silver took all the fall. A fall that was expected, but the white metal is on the verge of collapsing further. A fall that would see silver prices fall below most miners’ production costs.
But don’t worry about the silver bulls. Things may still happen on the chart over the next few trading days which could change the technicals. Instead of a breakdown, we could be talking about the base and silver starting a new uptrend here. Certain criteria must first be met.
I just covered the fundamentals and technicals on gold. The same things can be applied to money. There is, however, another major difference. Silver is primarily considered by many to be an industrial metal. Even though silver is more correlated with gold (the precious metal) than copper (the base metal), silver is used for industrial purposes and is not primarily considered silver. Personally, I just see it as a bonus for holding the money long term. You get the best of both worlds. The world will need more money to go green like solar panels and wind turbines. Going forward, I see a silver market where there is high demand but not enough supply. But for now, recession fears are putting pressure on silver and other industrial metals.
Any other reasons to be bullish on silver? It has to do with the movement of gold. I said in the past that gold goes up when there is a crisis of confidence. When people start to lose faith in government, central banks, and fiat money, silver collides with gold. Gold has been money for thousands of years, and no matter what happens to a country, be it war or a new regime, gold continues to be money in the new order.
Looking around the world, I see many reasons why the theme should be wealth preservation. Geopolitics, inflation, the energy situation in Europe which will start hitting the headlines in a few months, agriculture and drought, central banks breaking the system with rate hikes, a heavily indebted consumer and middle class . The list is lengthened increasingly. The argument is that the money will fall on the US dollar, but I think that will be a problem. The dollar will get too strong to break things. We are already seeing the effects of a stronger dollar with the Turkish Lira, Japanese Yen and possibly soon the Hong Kong Dollar. Let’s not forget the euro and the pound sterling either!
If the dollar gets too strong, what will the rest of the world do? Especially emerging markets with significant dollar-denominated debt. A debt that has just become very expensive with the rise of the dollar. Bretton Woods/Plaza Accord 2.0 anyone? The Fed and the US could be forced to devalue the dollar as a stronger dollar takes its toll, but that’s something that won’t happen tomorrow. This is exactly what I see playing out in the long run. For more details on this and the Milkshake Dollar, see my recent Gold Coin.
Not only do I see silver turn to gold when things “break”, but I also see funds moving into silver. The movement in silver has the potential to be explosive given the smaller market size of silver relative to gold.
I want to re-emphasize the subject of inflation since it literally makes the headlines in the financial newspapers. Currently, the financial media and even central banks are claiming that inflation is high due to war and supply chain issues. Nobody really asks what the rate hikes will do to alleviate these problems. If you look at the definition of inflation, it’s always print money. The truth is that governments have printed a ton of money and we are in a situation where there is more money in the system competing for the same number of goods and services. This excess money must be removed from the system. Ironically, the Inflation Reduction Bill passed in the United States risks increasing inflationary pressures rather than reducing them.
What about central banks, you say? Here’s the thing, central banks haven’t really printed excess money. In 2012, the Federal Reserve did something called Operation Twist where it bought bonds on the long end of the curve (increase in money supply), but then sold the short end (removal of excess money ). With the pandemic, the Federal Reserve did something called Reverse Repo. Essentially, the central bank bought bonds (increasing the money supply) but immediately borrowed the money it had just given to the banks (reducing the money supply). The money supply only with the interest payments that the Fed makes to the banks. The government and its spending policies are the real culprits.
Now let’s see some graphs!
Starting with the US Dollar (and some hope for the silver bulls!). The dollar recently broke out of a triangle pattern taking 106. DXY rallied to the 110 level. We saw some resistance here and the dollar initially sold off. We struggled to make new highs, which was good news for precious metal bulls.
It is possible that the US dollar will sell out here. The big question though is whether this selloff will be another reversal or just a pullback in the uptrend.. The first case would be positive for gold and silver. The second case would bring some relief to the precious metals, but would then mean that we break below our important support level.
We now have the main fundamental news. Inflation has skyrocketed and markets are pricing in more rate hikes from an aggressive/hawkish Fed. The dollar had a strong day in the market as it readjusted its sentiment. If we see the dollar close above 110, then the strong uptrend in the dollar continues. If we struggle, the dollar could print some kind of double top pattern which would be a bearish signal.
But for me to go completely bearish on the US Dollar, I need to see a drop below 105. I think a break below 108 would only be a pullback from the uptrend.
Money time.
The chart above is the long-term weekly schedule. Each candle you see represents a full week of trading price action.
Back in May, I warned readers of a blackout on silver. My downside goal? $18. Just simple technical levels using support and resistance or price floor and price ceiling.
Now, a few months after that call, I’m here to tell readers that another outage is possible. If silver closes below $18 on the weekly timeframe, we have another breakdown. If that happens, the next major support level is $16 or $15.
What are the criteria for a breakdown? A weekly close means that at the end of the trading week on Friday, we will look at silver’s weekly chart and see if silver has closed above $18.
If silver doesn’t crash here, we could be bracing for a reversal. Much depends on this chart in US dollars.
If I go to the daily chart, where each candle represents a single trading day, you can see how important this current support level is. You can also see that on the daily we actually closed below that level. Yeah. But luckily, the break turned out to be a fake breakout as the bulls recovered the $18 zone. If we hadn’t, our weekly confirmation close would have been triggered.
Nothing is confirmed until this weekly closing.
To the left of the chart you can see what happened to silver the last time we tested $18. At the end of July 2022, we bounced off this support. This is what bulls ideally wanted to see, and maybe what they will see. I have to say that I first liked how the price of silver moved on August 12th. We had a monster 5% rally. Unfortunately, there was no tracking data on inflation.
We are now in a pivotal zone on the daily chart. The $19.25 area was the previous lower high. Essentially, as long as silver remained below this level, the downtrend was going to continue. We removed this lower high which is a bullish sign. But can we retain it after the inflation data? If we cross it, we will be back to $18 and probably lower.
There is a chance that the dollar will climb again but fail to reach recent highs. This would result in silver falling to $18, but then bouncing from there. It might take silver bulls on a roller coaster, but it would set us up for a double bottom pattern…just like the dollar prints a double top pattern.
Stay positive and keep stacking!
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