Silver Short Squeeze Unable to Ignite the Gold Sector...Yet
In the earlyhours on Wednesday, I alerted readers to a short squeeze which wasbeginning to take place in the silver market. Silver rallies are typically aninflation play, so the shorts began to cover when the CRB Index began to rallytowards its January high. However, while silver has risen nearly 4% this week,it has yet to ignite the gold sector which stalled yet again near strongresistance at $1365 and sold off $15 into the COMEX close on Thursday. As Ihave written in a previous missive, gold must close above $1,365 for a long-awaitedbreakout.
Since thenearly 3% gain in silver took place on Wednesday, we will be unable todetermine how many short contract positions are being covered by speculators intonext Tuesday, until April 27th. The Commitment of Traders reports(CoT) are released each Friday but only show data through the previous Tuesday.The speculator short covering paused at the $17.20 area yesterday and themarket may soon begin to lean on the confluence of resistance around the $17.50region. This level represents resistance from multiple technical sources,including the 90 and 120 week moving averages, the weekly trend from July of 2016,and the daily trend dating back to April of last year. A close above $17.50should spook the speculative shorts even more, further fueling the rally andtargeting long-term resistance at $18.50.
Meanwhile,the miners have also been unable to benefit from the bullish situation in thesilver space with the GDX rally stalling at the $23 resistance region. Theminers are close to being short-term over-bought on a daily basis, so a bit ofconsolidation around this level would be healthy. We still need a solid closeabove the $25 level in the major miner ETF for confirmation of a breakout inthe miners.
Although thecontinued failure of gold breaking out is further frustrating the longsuffering precious metal bulls, silver is beginning to lead gold, bringing downthe gold/silver ratio from 82 to 78 and it should continue to fall. Silverout-performing gold is a sign of a healthy bull market based on long-termeconomic fundamentals including rising inflation. Although gold stocks havealready been leading the price of gold since the global equity panic ended onFebruary 9th, silver out-performing gold has been a missingingredient for an imminent breakout in gold stocks.
Furthermore,this week's surge in commodities has been attracting the attention of markettimers, as rising commodity prices are a leading indicator of inflation. TheBloomberg Commodity Index ($BCOM) is near an upside breakout and istesting overhead resistance at its January high. Although the CRB Index hasalready reached a two-year high, a close above its January peak would put it atthe highest level in more than two years. This index began a new uptrend from amajor bottom at the same time the GDX began a massive six month up-leg from itsmajor bottom in early January of 2016. Crude oil, which is also an inflationgauge, has already reached a three-year high this week.
Since theend of 2017, U.S. dollar weakness has been the biggest driver of strength ingold and continues to work off an oversold condition by trading sideways forthe past three months. While the gold price is trading sideways and buildingstrength for what appears to be an imminent breakout, the worlds reservecurrency has been creating what appears to be a bearish flagging pattern on the Cash Settle Index at the sametime. The U.S. dollar low of March 30th at 88.53 should be monitored closelyand violating this level could spark a gold sector rally and a subsequentbreakout.
All theprecious metals need is a catalyst to spur a sizeable rally. With silver andthe miners now leading the gold price, combined with the near-term possibility ofeither a US dollar breakdown, and/or a commodities breakout, the second leg ofthis new precious metal miner bull market may be close at hand. If you requireassistance in choosing the best quality junior resource stocks to invest,please stop by my website and check out the subscription service at http://juniorminerjunky.com/
By David ErfleContributing tokitco.com
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