What’s Changed to Cause the Gold and Silver Breakout?

What’s Changed to Cause the Gold and Silver Breakout? by Tom Luongo for Gold, Goats and Guns

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Gold and silver had bang up weeks. Gold closed yesterday afternoon on a cash basis above $1900, at $1901.95 just $18 shy of the all-time high set in September 2011 at $1920.

Silver, which has famously lagged behind gold for two years now, finally broke through the post-Brexit vote high of $21.13 (again cash basis) on Monday and never looked back, exploding above $23 to close this week at $22.77 an ounce.

The weekly prints weren’t even completed yet when I start seeing the calls in my inbox saying they are incredibly overbought. It’s an easy position to take into a breakout because of indicators like 200 day moving averages and Bollinger bands, because these this indicators are all about mean reversion strategies.

And, yes, markets always revert to the mean. But they also stay irrational far longer than you can stay solvent. This is especially true when central banks around the world pump trillions into the markets to keep them from collapsing.

Markets don’t trade on fundamentals or statistical regressions of the past.

Markets are forward-looking.

They trade on momentum and sentiment.

Instead of piling on some, frankly, superficial technical analysis about how silver is now X% above its 200dma and that means it’s overbought, the question one should be asking is, “What in the holy hell is going on here?”

I think there are a number of factors at play that have all lined up to answer that question.

The first is the most important, which I’ll focus on. This week’s proximate cause was the breakdown of the U.S. dollar index (USDX) because of the shift in the political and fiscal structure of the European Union. The USDX had been plumbing recent lows as the markets bought into a reflation trade surrounding the end of the COVID-19 lockdown around the world.

Gradually, all that money that was stuffed into the hands of the banks, the hedge funds and Blackrock as the U.S. treasury’s agent bid asset prices higher, honestly, across the board, with the exception of oil.

U.S. bond yields are at historic lows, stocks historic highs, gold now within $20 of its all-time high. But, what drove the USDX to new lows?

Why was the U.S. dollar the only thing seemingly on sale?

The sharp rise in the euro thanks to a successful European budget and COVID-19 crisis summit, the outcome of which, by the way, was never in doubt.

Because currency traders are now betting the farm — or at least signaling that they want to — that the European Union will now become a proper political and fiscal entity since the European Commission now has both taxing and spending authority directly.

This has been the thing the markets have been punishing the euro for for years. And now the process has begun.

The euro blew through the March high when capital flew out of U.S. assets for a short time to quell European bank solvency fears and then promptly rushed right back out the minute the worst of the crisis ended.

You look at this weekly chart of the euro and tell me markets give a rat’s ass about 200 day moving averages in a crisis (shaded area of extreme volatility)?

It’s clear from the chart that the March low in the euro was significant and a new weekly closing high is far more important than how far away it is from its historical average.I was unconvinced in this rally in the euro until last week when the euro close strong for the first time above $1.13 (orange line, see chart). It had failed to convince traders going into a weekend they wanted to be long the euro, regardless of where it stood versus the long term.

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