Silver just soared a bit above its previous medium-term high, above its long-term 61.8% Fibonacci retracement, and above the $36 level.
If this breakout holds, silver would be poised for a quick run higher. So far, its trading above $36, but we’ll see how long that remains to be the case.
If it doesn’t hold, we’ll have breakout’s invalidation and – most likely – another sizable downswing. This second scenario is still more likely, as the white metal is known for fake breakouts.
The short-term chart shows that the resistance line was hit. It stopped the rally earlier this year, and that was the start of a massive short-term decline. Will the history rhyme?
The strength of the long-term resistance suggests that this is going to be the case.
The 61.8% Fibonacci retracement held so far, so the odds are that it will keep the rally in check also this time.
What if it doesn’t happen? What if silver confirms the breakout? Then the outlook will change, and we’ll likely switch our position similarly to what we’ve done with the mining stocks.
For now, however, silver’s breakout looks like any other fake-out. The only difference is that the level that is being tested is much more important than the short-term resistance levels that are tested more frequently.
Also, today’s rally materialized right before the ECB’s interest rate decision and before the initial jobless claims statistics, so anxiety connected with both serves as a good reason for the rally. And one that’s not here to last.
Gold price moved higher as well, and while the breakout above its declining resistance line and the 61.8% Fibonacci retracement level appear bullish at first sight, let’s not forget that we saw exactly the same thing in 2012 – at the final top.
Back in 2012, silver was not as strong as it is now, but it’s also true that in 2011, silver was after its own parabolic upswing with a top at $50, so that was not the “normal” situation. Right now, the circumstances are more “normal”, which means that silver playing catch-up and outperforming gold in the final part of the rally is also normal.
This time – unlike in 2012 – we have a more bullish situation in gold stocks.
After years of relative weakness vs. gold (the HUI Index is not even above its 2008 high, let alone its 2011 high), we see medium-term strength and a verified breakout above the previous highs. Miners are also up today, and the two gold stocks that my subscribers are holding are up over 3% and over 4%, while GDX is up by just 2%. More strength in those two is coming.
And silver? We’ll see. Silver’s next hours / days will decide its near-term and medium-term future. A big move in the white precious metal is coming, and we’ll soon know in which direction it’s going to be. To clarify, those holding silver for their retirement might not be that much affected by the short-term moves as the long-term potential remains intact.
If this wasn’t silver – that is known for fake breakouts – I might be already excited about today’s breakout’s bullish potential. But silver IS silver – with all its wonderful (and tricky) properties.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief