Just a quick update as things are moving quite fast in the PMs, especially in the case of silver.

In today’s regular Gold & Silver Trading Alert, I wrote that when silver is outperforming and miners are lagging, it heralds the upcoming decline in the precious metals market. The emphasis was on the relatively weak miners, but after today’s run-up, the spotlight moved to rallying silver.

What did miners do today? They moved back to Tuesday’s closing price after trying to rally above it (this additional rally was erased). It’s not a big deal in case of the price levels that were reached. It could be a big deal, because today’s session could mark an invalidation of yesterday’s breakdown below the neck level of the head and shoulders formation (in both: GDX and GDXJ). There’s only one “tiny” problem with today’s rally. Actually, it’s a big “problem”.

This move is almost completely artificial. It’s caused by an organized action to pump-up the silver price by Reddit forum users: the biggest short squeeze in the world - silver - $25 to $1000. In short, this is the same group of users that pushed GameStop shares well above $300, triggering a parabolic upswing. The aim is to “squeeze out” the short sellers from the silver market and hurt the big banks that are supposedly manipulating their price.

Now, there are many ways to view this.

One way is to say that the brave individual investors are stepping up against the “banksters” and that the individuals finally have power to win over them (after being taken advantage of by the financial system for so long).

Another way to look at it, is best represented by a message that I received from one of our subscribers:

“The younger US generation with the buying yesterday of GameStop, AMC and Blockbuster are illustrating what I was referring too. My children are in their 30’s. They have friends who now are working from home because of COVID-19 and have free time. They spend their free time buying stocks. They have no idea of the fundamentals or technicals of a market. I’m constantly hearing about all the money they are making. This is what I was referring to as “gambling".”

I’d add that thanks to the stimulus money and easy access to leveraged apps, the market power of the individuals is now more visible than ever.

Is it brave or is it irresponsible? Is it prudent or is it silly? That’s not the questions that I reply to – you be the judge. What I will say, however, is what the market is most likely to do next in my view.

As eager as the voices on the Reddit forum are, I see very little chance of them changing anything, even the short-term trend. They were able to trigger a substantial very short-term move higher in silver and in some mining stocks (in particular, in AG, which was particularly emphasized in the forum post), which is impressive, but I’d say that it seems to be “it”.

Even assuming that they are fighting against the big banks’ short positions and they are doing the market a favor, it seems to me that they are no match to the amounts of capital that the big banks are able to use to offset this effect. But… Why would they? These particular investors’ capital is likely to dry up soon anyway – if it hasn’t dried up already. The prices need fresh buying power to keep rallying, and the analysis of today’s intraday volume shows that the buying power mostly dried up after the first hour of today’s session. In fact, we see that the prices have already turned south after an intraday top.

As the bigger investors do what they were about to do anyway, these “new investors” are likely to start suffering losses and then they are likely to sell in panic, thus helping to form the final bottom of the short-term or final decline. In fact, that’s what’s usually happens in the case of silver, which “catches up” with gold and miners close to the end of a given move. Only this time, it’s so clear how this all works.

All in all, the bearish outlook for the precious metals sector remains intact.

As always, we’ll keep you - our subscribers - informed.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief