by David Brady, Sprott Money:
Precious Metals Fundamentals
In terms of fundamentals, we have a dovish Fed and elections dead ahead. The Fed has already cut rates by 50 basis points to 5.00%. Another 25-basis point cut is already baked into the cake on November 7, with a probability of 92%.
As for the elections, whoever wins, they are likely to continue massive fiscal spending, driving up inflation at the same time interest rates are falling. The only downside risk is another 2000 event, where the result of the election is disputed.
Geopolitical events, such as war in the Middle East, have died down for now, but this may be the calm before the storm. Any escalation in hostilities is bad for the world but typically good for Gold and Silver, as the Ukraine and Israeli invasions showed.
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Saving the best for last, the probability of a crash in stocks rises as equity prices go up and as time passes. I still believe that this crash will happen post the elections on Nov. 4, most likely sometime in the first half of 2025. When that happens, just like in 2007-2008, it will drag down stocks, bond yields, real estate, banks, and precious metals. However, I expect Gold and Silver to fall sharply, but briefly. In 2008, the metals took off six months ahead of QE1 in March 2009. In March 2020, it took just two weeks. Hence, when the proverbial hits the fan, I expect Gold and Silver to anticipate the usual response from the Fed and soar even higher.
Gold Price Trends
Gold Price Chart
The upward trend of higher lows and higher highs began in October 2023, aided by a massive double bottom. Signals of a major trend change are typically double or triple tops or bottoms, or blow-off top or capitulation. Other indicators such as the RSI, MACDs, sentiment, and COT positioning data, tend to take a back seat while the trend continues. For example, the RSI was extreme overbought in March and April, yet the trend kept going up.
“The trend is your friend, until it isn’t.” This means that the trend higher will continue until we get a lower high and a lower low. The prior low was $240.63 ($2619 in Gold) on October 8. For the trend to turn down, that support level needs to be taken out, followed by a lower high. Until that happens, the trend continues higher.
Silver Price Trends
Silver Price Chart
The trend remains up in Silver too, despite the recent pullback. Only a drop below $27.50 in SLV ($30.34 in Silver) signals a possible trend change. Until then, or until a higher low is established, the trend remains up.
While sentiment in both metals is extremely bullish and the technical indicators are overbought and falling, with the Banks holding a near record short position, this means nothing until the trend breaks the prior low.
For this reason, I recommend the use of trailing stops to maximize your gains and minimize your losses. Place a stop loss below the prior lower low. If a new higher low is established, just raise your stop below it. This method keeps you in the market, and if you had done that in Gold since the bottom in October 2023, you would be up over 50% in gains. In Silver, it’s closer to 100%.
If the prior low is broken and then the price turns back up above the prior low, a fake breakdown, just buy back in. However, if the prior low is broken followed by a lower high, the risk is that the trend is turning down and it’s time to step aside and bank your profits.
Alternatively, just buy the physical metals and let it ride. This is the best way to avoid over-trading and keeps you in the market as Gold and Silver continue higher. If the trend turns down, put options are a great hedge for those who know how to use them.
