One week ago, I warned silver bulls that a major support zone was being tested. It was silvers make or break week. You all know I am bullish when it comes to the white metal. However, I must trade the charts that I see rather than the charts I WANT to see. Unfortunately, we have a big technical breakdown which does not bode too well for silver. Not what silver bulls want to hear a day before the Vancouver Resource Investment Conference.
In terms of the fundamentals, we continue to Fed watch. The US Dollar has been soaring bringing down silver and gold. The Fed is expected to continue to raise interest rates to tame inflation. Continue to watch the US Dollar as we are beginning to see cracks in the economy. Many analysts and big names on Wall Street are now saying a recession is on its way sooner than expected. We won’t see a recession in 2023 but in 2022!
If this occurs, the Fed would need to pause current monetary policy and one would think, begin to CUT interest rates in order to stimulate the economy. The problem is that inflation will still be there. This is okay if inflation is purely non-monetary, ie: supply chains, higher oil prices etc. It will be a problem if inflation is monetary, ie: 85% of all Dollars ever printed were printed in the last two years, no productivity increase so we have a situation where there is more money in the real economy chasing the same number of goods and services. Many are already stating the US sees stagflation, a situation when the economy is weak but inflation remains high. Even former Fed chair Ben Bernanke sees stagflation ahead.
I don’t know about you, but wealth preservation still is at the forefront of my mind when determining what to do next. A lot of people are going into cash, which is a good position. But maybe not so much in an inflationary period. As Ray Dalio has been warning about for years, “cash is trash“. It is likely that governments will continue to print money and increase money supply which will worsen inflation. The Federal Reserve can actually get away with it through reverse repurchase, or commonly known as reverse repo.
Precious metals are still the place you want to be, and to be honest, we have been expecting another major drop due to the US Dollar strength. Money from all over the world is running into the safety of the US Dollar. If the Dollar bull run continues, we will start to see issues with emerging markets with high US dollar denominated debt. To put it bluntly, a stronger dollar will wreak havoc on the world. This could lead to another sort of plaza accord where the dollar has to be devalued, and likely leads to some sort of new economic system, or a reset of the current economic system.
Let’s start with the weekly chart. Major breakdown confirmed folks. Last week’s candle closed below our $22 support zone. A price floor which has been held five times going back to September 2020. When support has held for this long, a breakdown is a very significant turn of events. In the case of silver, a bearish turn of events. Technically, we expect silver to drop lower to the support at the $18 zone.
There is potential for some good news. A false breakdown. Whenever price breaks down or breaks out, we tend to see the price pullback to retest the break zone before the resumption of the trend. In this case, silver is currently looking to retest our breakdown zone. If by the end of this week silver manages to close back above $22, we have a confirmed false breakdown. Sellers would be trapped and their stop losses triggered. We would then continue the uptrend with silver aiming for $25 and $28 for the rest of the year.
If we go to the daily chart, you can spot the major inflection zone quite easily. A big resistance zone between $21.50-$22. Silver is testing this zone right now. If we can continue to form green candles heading higher, it sets us up for that weekly false breakdown confirmation. However, if we see silver stall here, or even print a large red candle, then the resumption of the downtrend is on the cards. In technical terms, we would be printing a lower high in the current downtrend.
Still a silver and gold bull for the long term, but we cannot ignore this major weekly technical breakdown. Expect lower prices unless we can confirm a false breakdown and climb back above $22. It might be a good time preparing to buy bullion at cheap prices, or pick up some silver miners that you have had your eyes on.