Gold and Silver Prices: Over-Bought, But So What?

Miles Franklin sponsored this article by Gary Christenson. The opinions are his and are not investment advice.

News for the week ending August 21, 2020:

a) Tesla stock closed at $2,050, up $399. P/E > 1,000!!!!!

b) Apple market cap exceeded $2,000,000,000,000.

c) Gold closed at $1,938, down $4 for the week.

d) Silver closed at $26.73, up $0.64 for the week.

WHAT HAPPENS NEXT?

• Will Tesla stock bubble up to $3,000 per share?
• Will gold rally toward $3,000?
• Will silver exceed $50.00?

ANSWERS:

• Tesla: Don’t know, don’t care. But bubbles always pop, and Tesla stock prices look ready to implode. Caveat: This has been true for several months, but Tesla stock prices have surged higher, along with other tech stocks that central banks support.

• Gold and Silver: Wrong questions! Yes, they will trade much higher than current prices. But what is your investing time horizon? Do you expect to trade in and out in a few weeks, a few months, several years, or perhaps in decades? Your time expectations affect what the next major move means to you.

• Gold and silver are “over-bought,” but are they likely to correct before continuing their rally?

BETTER QUESTIONS:

a) Do I trust central banks and corrupt governments to drive debt higher every year?

b) Do I trust The Fed to devalue the dollar’s purchasing power?

c) Do I trust almost all markets to rise, fall, and rise again?

d) Are gold and silver real money, not debt-based counterfeits issued by central banks?

e) It is an election year. Each party will create problems, but both groups will print, borrow, spend more than revenues, and devalue the dollar.

f) Gold reached an all-time high. Silver spiked up to a multi-year high. Will their next big moves be corrections or continued upward rallies?

Regarding “mania,” think Tesla stock prices.

Gold and Silver Are Over-bought. So What? Examine the chart of monthly silver prices.

The monthly silver RSI (a timing indicator that moves between 0 and 100) has exceeded 70 (red line) six times in the past 20 years. Points 1, 2, 3, and 5 marked significant silver price tops. Point 4 indicated a pause in the huge rally of 2010-2011. Point 6 is the August 2020 reading of 74.01.

Do you think point six is like point 4 (continuing rally) or an intermediate term peak like points 1, 2, 3, and 5? Good question—we don’t know yet.

The weekly chart looks like the monthly chart—price moves “too far, too fast.” The weekly RSI shows an over-bought condition that suggests a peak because it has rolled over. The MACD has not turned lower but could at any time.

The daily silver chart indicates an important peak occurred on August 7, and prices have fallen since then. The RSI and MACD will fall further if prices correct back to the $18 – $22 region.

WHAT WILL IT BE? Higher or lower?

a) The RSI (and other indicators) suggest lower prices ahead based on the correction of a strongly “over-bought” condition.

b) Markets correct rallies that have moved “too far, too fast.” The correction could occur here, or from higher prices.

c) The Elliott Wave folks (some of them) expect much lower silver prices. Maybe! Perma-silver-bulls expect higher prices.

d) Silver prices, based on the RSI, are/were over-bought on the monthly, weekly, and daily charts. There is no guarantee, but it suggests the next big move is more likely down.

WHAT COULD GO WRONG?

• The silver train rolls out of the station and you are standing on the platform, waiting for one more correction. Think early 2009 when silver sold for $12 on its way to $48.

• While you wait for the correction, silver prices explode higher, because of a new war, cyber-attack, bank collapse, market crash, derivative failure, or other shock to the financial system. 

• If your investment horizon is several years, ignoring a possible correction will make little difference. If your horizon is several weeks, the correction concern is important.

• If you stack silver or dollar cost average, buy the dips.

• Buy now at $26, watch the price fall to $20, become afraid the price will fall to $15 or lower, and sell out a week before prices explode toward $35. This sounds silly but happens often. WHY are you stacking silver? Maybe you should buy and sell Tesla stock instead.

“OVER-BOUGHT” CONDITIONS:

• Level one over-bought: Monthly RSI > 70, weekly RSI > 74, and daily RSI > 78. Define this as a level one condition.

• Silver prices were at level one over-bought on August 7. That was a danger zone and prices corrected. Is the correction over?

Over the past 50 years:

• Silver prices have reached a level one condition 7 times, and every time they fell 23% to 35%% in about 1.5 months.

• Gold prices fell about 15% in 1.5 months, under similar conditions.

• Silver prices can surprise us, but history indicates a correction is more likely than continued rally. Will this time be different?

AN EXAMPLE OF OVER-BOUGHT DOES NOT MEAN A TOP:

Tesla stock bubbled higher to over $2,000 per share, like the tech stock rally in 1999—2000. The stock is “over-bought.” However, over-bought does not guarantee peaking. Tesla stock was over-bought in July at $1,795, fell back to $1,365, and then rallied again.

Examine the monthly chart. Tesla stock reached level one over-bought in July, corrected lower by 24%, and then rallied further. It has reached level one over-bought again in late August.

• Tesla stock climbs higher. Five waves up may extend, but they suggest extreme caution.

• Silver prices hit a low of $4.84 in April 1976, and 21 months later they hit $50.00, up a factor of 10.

• Tesla stock prices hit a low of $177 in June 2019, and fourteen months later they hit $2,048, up a factor of 11.5.

• Silver rallied into a bubble in 1979—1980. Is Tesla stock different? Tesla’s rally has been faster in time and price appreciation than silver’s rally in 1979-80. Hmmmm!

From Sven Henrich: Reality Check

“The larger market is struggling, correcting even as the rotation trade once again was left in the dust of another vertical chase into key tech stocks which are now historically overvalued, technically extremely stretched and at even higher risk of a violent technical reversion.”

CONCLUSIONS:

• Silver prices and gold prices (not shown) reached level one over-bought conditions in early August – be careful. They could rally higher or correct from here.

• Tesla stock is over-bought as measured by the monthly, weekly, and daily RSI. It is showing a level one over-bought condition. Caution is warranted.

• Debt is exploding higher. Government spending is accelerating. The Fed is “printing” banana-republic style and buying Treasuries, to keep interest rates low and fund government deficits. Expect more “printing.” This fiscal and monetary nonsense is good for gold and silver prices.

• The dollar has been weak for months. It is moderately over-sold but dollar fundamentals are lousy. A short and sharp dollar rally might correct gold and silver before they rally higher.

• What is your investment horizon and your desire to accumulate silver? That determines the importance of the “over-bought” conditions that exist in gold and silver.

• MY CONCLUSION: Silver and gold are going much higher. They may correct 10—25% first. In the long term, gold at $5,000 – $10,000 and silver at $100 – $200 are not unlikely.

• Tesla stock is in a bubble. Watch out below. Buy gold and silver!

Miles Franklin will convert digital and paper dollars into real money – gold and silver bullion. They do not trade Tesla stock. People trust Miles Franklin to sell valuable products at good prices. People trust the Fed to devalue dollars, which will extend the five-decade gold rally from $40 in 1971 to $2,040 in 2020. The next decade could see gold priced at $10,000.

Gary Christenson