As you may be aware, precious metals prices have been falling as of late. While some traders and investors believe that the bottom is in, I’ve been writing constantly on my blog about why I believe gold and silver’s downtrend still has a ways to go.
All the reasons I’ve listed on my blog are short term reasons. Here are the more significant medium term reasons why precious metals have to fall a little more before a massive rally ensues.
Silver has Yet to Make a New Low
Gold has made a significant $55 new low compared to its November 2014 low. On the other hand, silver has made a new low by only a few cents, which is to say that silver has yet to make a real new low. Herein lies the problem.
Gold and silver must make new lows together. This is the minimum requirement that gold and silver have to satisfy before a downtrend can end. Historically speaking, gold and silver always moved together. This means that when gold made a significant new low, so did silver, and vice versa.
With gold having already made a significant new low, silver must follow. This means that silver has to at least fall below $14 for it to have made a “significant” new low.
The Gold:Silver Ratio is Too Low
The Gold:Silver ratio soared in each of the three main downtrends in the current precious metals bear market:
- August-September 2011
- September 2012 – June 2013
- July – November 2014
There is a simple reason for the Gold:Silver ratio spikes. Each of these 3 main downtrends saw gold and silver prices make significantly lower lows, as gold has done recently. Since silver is the more volatile of the 2 commodities, silver’s price always falls more (percentage-wise) than gold’s price in a downtrend, causing the Gold:Silver ratio to soar.
The current downtrend began in May 2015. The Gold:Silver ratio increased from 68 to 77 throughout this downtrend. Such a tiny increase in the ratio is not normal. In other words, the Gold:Silver ratio must spike before this downtrend can end. If the ratio is to spike, then silver must fall more than gold in the near future.
There’s Been No Real Crash
Each of the three main downtrends in the current precious metals bear market saw gold and silver prices crash. There has been no crash in the current downtrend thus far, which is why this downtrend is clearly not over.
The flash crash on Sunday night (July 19) does not count as a real crash. That flash crash happened on small volume, when most traders were asleep. A real crash – the kind that happens near the bottom of a downtrend – is a crash that lasts throughout the entire day.
Gold and silver prices should get absolutely slaughtered in these types of crashes. Prices should keep tanking regardless of how low intraday momentum (RSI) is, and the price should close near the low of the day.
In addition, there’s been no capitulation among precious metals traders. The interesting thing is that while traders will buy precious metals in the middle of a downtrend, they’ll often sit on the sidelines when the real bottom is in. This is because the final part of a downtrend is particularly fierce, so most traders decide to wait and see what happens in case they get caught in the middle of the crash.
As we speak, too many traders think that the bottom for precious metals is in. Based on the two dozen precious metals traders that I know, at least half of them are either long gold or gold miners. Precious metals prices cannot bottom without capitulation on their part. The only people that buy at real bottoms are long term value investors like GMO manager Jeremy Grantham. Traders tend to sit on the sidelines when the market actually bottoms.
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