9:00am EST 8/7/2020 - Trading Lab Morning Email

This was silver last night:

Silver rose ~25% in less than 72 hours between early Tuesday morning and Thursday night.

What was once a steady, measured climb higher has turned into a completely vertical parabolic move in recent days. The price action in silver futures yesterday evening was reminiscent of the final days of silver's ascent to near $50/oz in April 2011.

I should know. I lived and breathed nearly every price tick of the final days of that rally, and then pounced on the short side once the top had been put in place. Volatility is increasing in precious metals, particularly in silver which has seen its average daily trading range increase 3x since mid-July. This is generally not a healthy phenomenon for a market longer term and is often one of the key characteristics of a shorter term topping process.

This is a good time to remind ourselves of the importance of being clear on ones time frames. I have little doubt that silver will trade above $30/oz at some point this year, and it will trade above $50/oz at some point in the next few years. However, we have seen silver rise from below $12/oz in March to nearly $30/oz last night, and the steepness of the recent ascent is undeniably parabolic:

The strength of the silver breakout since July is extremely bullish in the big picture, however, in the shorter term there is a strong odor of greed in the air across the precious metals space - the silver chart is the poster child for this greed.

Can greedy get greedier? Yes, always.

However, if you care about risk vs. reward then you can't ignore the overstretched euphoric sentiment and parabolic price action.

A correction is close at hand.

Another recent curiosity has been the weakness in the large/mega cap precious metals producers:

I want to emphasize an important point this morning. Most sector commentators and newsletter writers have been stumped by this recent weakness and have decided that the gold/silver stocks have no choice but to "catch up" with the metals.

This is the wrong way to view this situation. Remember that miners led on the way up in April (Barrick and Newmont turned higher quickly from the March lows and soared in April and early May). In fact, NEM has barely budged higher from its May peak despite gold's continued ascent.

Why is this? Equities are forward looking and the big hedge fund players who control the price movements of the GDX and mega-gap producers like ABX and NEM don't like the risk/reward of pushing these stocks even higher at this point in time. They were right in March and April when they piled in at much lower share prices, are they right again?

Remember, this doesn't mean they have to be bearish now. It just means, they're not super bullish. It's time for a correction through time and/or price.

I have a vested interest in precious metals going higher over time. I'm biased. However, in my writing and analysis I strive to be as objective as possible, even if it may be against my long term economic interests. Many commentators in this sector only see things one way and in one time frame. I aim to entertain different possibilities including those that are against my natural bias. I also analyze and trade markets on different time frames.

Just calling it like I see it. As always, I am open to, and prepared to be wrong. 

DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.