We’ve just exited one of the most volatile weeks for the market in over a decade, and the clear winner was gold (GLD), as it shed only 2% last week, and finished the week less than 10% off of its highs. Meanwhile, the price of silver (SLV) was the furthest thing from a safe haven, falling 15%, breaking multi-year lows, all while having a worse week than the overall market. Despite this massive divergence in silver, we did not see complete capitulation among the small speculators, who continue to hold more silver contracts than they did last May, despite a silver price that is 15% below May levels. This suggests that we have irrational optimism among silver speculators at a time when the technical are the weakest they’ve been in years. Based on this, I continue to see gold as the more attractive metal to hold, and I would view sharp rallies towards the $16.00/oz level in silver as selling opportunities.
The best way to determine which market is the strongest is by watching what different markets are doing when the market makes an important low. For those watching closely last week after a 15% weekly decline for the S&P-500 (SPY), gold was the one asset class that stood tall above the rest. Not only was gold only off 2% for the week, but the metal barely sold off in the face of extreme selling pressure across all other asset classes. This suggested that gold was the only real safe haven, regardless of what the silver bulls seem to believe. In addition, silver’s 15% decline and break to new lows suggested that there’s no reason to expect silver to follow gold short-term and that the best way to play an inflationary trade on the gold price is to buy gold outright. Let’s take a closer look below:
As we can see in the chart below of silver, the metal remains in a downtrend after last week’s new low and has broken down through a multi-year base. This is not the type of price action we typically see in a bull market, and this massive reversal has crippled the bullish picture for silver. The fact that gold is within a stone’s throw of new highs at the same time that this is occurring is even more unfavorable for silver, as it shows the two have a negative correlation to each other for the time being. While sharp bounces to relieve oversold conditions are possible for silver, I believe it’s likely that silver will fail at its downtrend line near the $16.00/oz level if we do rally. Therefore, I see no reason to bullish on the asset class here.