It is interesting how sometimes a chart will do what it thinks it is supposed to do, even in the face of other information that says it should do something else. Silver’s chart, as we have been noting, was supposed to test support and that is what it has been doing while the rest of the precious metals complex rises.
If the test is over it will have been the gentlest, most benign support test on record. But we cannot call it over because silver remains in a downward consolidation channel. Only a break out and above the noted resistance will call the test over.
Meanwhile, silver remains in an odd divergence to the precious metals sector in general.
Usually the big up phases are led by silver but that is not what is happening now. Here I want to dial back to beginning of the secular bull market in the precious metals and review a monthly chart of the Gold-Silver ratio (GSR).
While the GSR and HUI have indeed spent most of their time in negative correlation, the launch phase of the bull market (2000-2003) was different.
That is fine, we can cherry pick any number of reasons not to be concerned about the silver-gold divergence currently in play. But what I find significant is that 2000-2003 was the beginning of a great bull market in one class (precious metals) and the end of a great bull market in another (stocks).
Has not the last year been all about portraying the end of the precious metals bull and the beginning of a new secular bull market in stocks? If somehow that proves to be nothing but wishful thinking for conventional market players the correlation to the 2000-2003 period makes sense.
Several months ago I called what is happening on the macro a ‘Mini Me’ version of 2000-2003 period, where perceptions had been realigned so bullishly on stocks and so bearishly on gold, silver and the miners that any coming macro pivot could prove to be a perhaps somewhat smaller version of the utter love for stocks and hatred for gold that marked the prior pivot in 2000.
Bottom Line
Dogmatists and silver pumpers will be confused by the silver-gold divergence, but there is precedence for it and that precedence is in alignment with a macro view (current period being similar to 2000-2003) that we have had in play for some time now. At some point one would expect silver to get it together, but it need not do so on anyone’s time but its own.
When silver does start to lead, that might be the next phase when more momentum orientated traders start coming aboard as the sector begins the long process of accumulating unhealthy holders into whatever coming top lay out there on the distant horizon. In other words, we could be on a ‘wash, rinse, repeat…’ cycle with its starting point similar to the year 2000.
Nominal silver has not yet passed its test. If it fails, the sector would be in trouble in the short term. If it passes and begins to rise, the best gains would be out in front of us.
