Gold and Silver “Flagging Out in a Big Way” - Precious Metals Projections, May 2021

Craig: Welcome back to the May edition of "Precious Metals Projections," a new service we have here at Sprott Money. We've been doing this now for a couple of months, getting a lot of good feedback. I'm your host Craig Hemke, and joining us is Chris Vermeulen, of course, of thetechnicaltraders.com. Chris is an expert in technical analysis, and it's fun to hear from him every month or so. Chris, thank you again for sitting in this month.

Chris: Yeah. Thanks for having me, Craig.

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Chris, we've got all kinds of interesting things to discuss, and I know I'm dying to get your technical opinion on gold, silver, and the mining shares. Before we get started, though, we actually had some questions from regular listeners that they asked us to address. One of them I'll just grab myself, it was a person wrote in, said they got all kinds, thousands and thousands of shares of the SLV. Now, what's the difference between that and the PSLV? Why are all the people on Wall Street Silver focused on PSLV instead? I can answer that on my own. That's easy.

Chris: Yeah.

Craig: SLV just simply provides you with exposure to price. That's really all it is. So, if you're a short-term trader, you want to make some simple options bets on whether silver is going to go up or down, SLV can do that for you. But whether they own all of the silver they claim...a lot of times, like back in February, they claimed to take in 110 million ounces of silver. Well, that was a logistical impossibility. We all know that. What they're mainly taking in is a promissory note, a future delivery. And if interest goes back out in the SLV, if people sell their shares, they just tear up those promissory notes. So, you're not really taking a lot of physical silver off the market when you buy SLV. PSLV is a whole other animal. Every ounce that that fund has to purchase actually gets delivered and held at the Royal Canadian Mint, fully segregated, fully allocated.

So, when you own PSLV, you actually own physical metal. I would encourage anybody interested in that to go to Sprott Inc., not Sprott Money, Sprott Inc., and go to their website, ask them the questions, take a look at their perspectives and find out how it works. And finally, PSLV, actually, if you have enough shares, you can actually cash it out for physical metal. The only entities that can cash out physical metal from the SLV are the bullion banks themselves that are named authorized participants in the SLV perspective. So, that's a critical distinction too.

The other couple of questions that came in, Chris, I'll turn it over to you. One was, you know, we had all this cash flow, what now, up to $2 trillion or whatever it is in the crypto sector. To what extent do you think all this interest in cryptos is siphoning off in demand for precious metals?

Chris: Yeah. Well, let me pull up the chart real quick. We can take a look here. And take a look at what cryptos are doing. So, you should be able to see my screen. Let's take a look over at Bitcoin. Obviously, Bitcoin, it's been a pretty wild ride. Let me go to the daily chart. We had a pretty big crack to the downside in terms of price action. Little bit of damage was done to this chart. When you look at it from a daily standpoint here, we've been making a nice series of higher lows. We've been making a series of higher highs, which they started to, kind of, stall out a little bit. And then we had this sharp drop, this little sharp drop and pause, and it broke the 50-day. We also broke a couple of these short-term pivot lows in price. So, that is quite a bit of damage and I think it's got the market a little bit spooked.

And now, the big question is what's going on with Bitcoin? Where's this money going to go? I know we're getting this knee-jerk reaction bounce to the upside. These next couple of weeks are going to be very critical in terms of what the price action is going to do. Now, if we were to look at the chart, typically, when you look at a rising trend and then how it rolls over to a falling trend, I like to look at it almost like a saw blade, like a circular saw blade, where it comes up, you've got these teeth and they create this saw blade price action. Eventually, you get a crest, it breaks the downtrend, and then you start to get the downward trends, which is a series of bear flags.

And so, that is the question, where are we right here with Bitcoin? Can it regain stability? Can it break? And is this going to be considered a little bit of a consolidation and it can go higher or is this, you know, the tide, the trend changing from an uptrend to a downtrend? And the next couple of weeks we're going to know for sure which way this is going. So, right now, Bitcoin's got me a little nervous because it's broken two previous lows. Typically, if price breaks to previous lows, that to me is a sign that the trend is now neutral or down, and now we've got a series of lower highs as well. So, we need to see where this is going to consolidate, which way it's going to break from that consolidation.

Craig: You got a key level you might watch there, Chris, back of a $60,000, or gosh, that could paint a little head and shoulder top, and then you go up to $64,000 again. You got a double top. I mean, you got to get above $64,000 to feel a little bit better about how that chart looks?

Chris: Yeah, I think so. I mean, it doesn't need to really break above it. I mean, it can rally back up to $64,000 and then it could build a little bit of a launchpad like another bull flag. If we were to just clean this up real quick, you could...you know, it could rally up here, maybe it's going to consolidate, maybe it's gonna have another push up and then consolidate. Depending on how it consolidates here, if it reverses really quickly to the downside and it has some type of inside bars, it could form a little bit of a bear flag to continue to go lower giving us that, kind of, you know, downward, kind of, blade saw action, but yeah, we want to see it rally up. We want to see it hold up and trade sideways at that level.

And then when it does break out, I think it'll have a lot more energy and some big follow-through. I mean, there's a lot of upside potential in Bitcoin's still. I still have a $74,000 target. If it breaks that, I mean, it could really explode all the way to almost $100,000. This pattern is very powerful with Bitcoin. This type of explosive move where it's kind of doing a running correction, it's kind of correcting as it's running up, a lot of momentum in here. When it breaks, if it breaks to the upside, it's going to have a very explosive move. And to me, I think it, kind of, could be like that last big hurrah.

But at this point, it's still very questionable, does this uptrend reverse and start to have lower and fizzle out? And when it does, if it breaks this previous low back here around $47,000, that's going to be a pretty scary level in the $45,000, which is this level. If that level is broken, I mean, it's probably going to confirm that we're in a downtrend and I think there's gonna be a lot of people exiting this because people do not want to ride something up all the way to the highs and hold onto it until it goes back to, you know, a few thousand dollars like it did back in 2018. That was not a ride people are going to want to experience ever again. So, when the tides change, sentiment becomes bearish, if these lows are broken, it's going to be mass exodus, and it could be a very sharp, a few huge red bars to the downside.

Craig: Yeah. Well, definitely worth...seem like a critical time. Speaking of critical times, we have a lot of folks out there thinking that the stock market is afloat, you know, almost solely on the liquidity nozzle being wide-open from the fed, the concern that we got and always seem to get, and a question came in again this week, I mean, the mining shares are equities too. And so, just in...I don't know, this is just mainly your opinion, Chris, I mean, you think, you know, a 20% pullback in the stock market, and I'm just picking a number off the top of my head, what's your inclination as to how that would impact the mining shares?

Chris: I think we'd see mining shares pull back. A 20%, that's big enough that it's going to cause a lot of panic selling. We're going to see the VIX spike dramatically. When the VIX spikes and people start to panic and the market falls, you know, over 5%, 6%, 7%, typically, we're going to start to see precious metals and miners get sold off with it. It's just, kind of, you know, when the tide's going down, it takes pretty much all boats with it. And so, there's definitely going to be selling pressure. And when there's panic selling, everything, kind of, gets liquidated. And I think it's something that could happen here sooner than later. This market is showing signs as right on the cusp of the stock market of rolling over. And then I think if that happens, gold miners are going to continue to, kind of, build out a base. I think they're trying to start a new rally to the upside, but if the stock market falls out of favor, they could be out of favor as well.

But this is also a time when we can see precious metal miners actually perform. They sometimes become that last strong sector just before the stock market has one of these big corrections. We see this happen time and time again. So, we just need to see if the gold miners and silver miners can start to break out and rally and become the leaders, which I feel like they could, but they just haven't fully, kind of, broken out and confirmed a new uptrend yet.

Craig: That's about...what's that blue line you got there, Chris?

Chris: That's the 50-day moving average.

Craig: So, that's about 5% down from here. You can certainly see we bounced from below there even on multiple occasions in the last couple of years, so certainly could see where that could happen. But until you really got rolling, that would probably, again, just be another dip that gets bought. But as we look at that, I want to talk about gold and silver, but we might as well segue right into the miners. Another question came in and said...you know, heck with the GDX and GDXJ, we can use those as a proxy, I guess, you know, not a lot of people follow the HUI or the XAU for mining share indices anymore. So, we use the GDX and GDXJ as, kind of, proxies for the sector in general, SILJ as well, SILJ for silver miners. Somebody wrote in and said, "Hey, I know Chris likes those Sprott managed funds," so why don't we look at them? So, you've got one pulled up there, the SGDM, which that's the gold miner, large-cap gold miner one, correct?

Chris: Yeah.

Craig: All right. Well, I know what I see there, looks like it's trying to break out of a consolidation phase and it looks like it's finding support at its 50-day, but needs to get through its 200-day. What do you think?

Chris: Yeah. It's, kind of, sandwiched between the 50-day and the 200-day. If we just draw some trend lines across these highs, just a rough trend line here, you can see that we are more or less, depending where you want to draw the trend line, the gold miner prices are trying to break through. If you were to take, kind of, an average price through here, you can see they've pushed up through that, had a little bit of a pullback over the last week-and-a-half. They're trying to hold out. They're still making a series though of lower...obviously, we've got a series of lower highs all the way down here, and this is still a standout lower high at this point. It does feel like it's the start of a new uptrend, but we're still making a series of lower highs. And you know, depending where this resolves, this could be a nice little bull flag that forms out. If this starts to break up here, the next run is going to bring it through this green 200-day moving average. And if it can get through there and have this push up, we're most likely going to break this previous high over here.

And then at this point, we will have broken, kind of, you know, two previous highs. Depending on how you look at it, we've got a high right here, we've, kind of, got these highs over here, and these. And that, to me, will be, kind of, a shift in momentum. We actually have a series of now higher highs, higher lows clearly defined on the gold miners. And from there, I think we could see them build some longer base here and then really take off. So, I think there's a lot of upside potential for miners to come into favor over the next month or so. Typically, we see "sell in May go away," is the saying, and a lot of times we can see the miners actually perform fairly well as people, kind of, move to a defensive sector and they look towards the gold miner sometimes for that.

Craig: I wonder too, you look at that and I can, kind of, project a little forward, you get above that 200-day, you start getting a little, kind of, virtuous momentum. What's out about six months down from the peak down to that bottom at the end of February, maybe by August, we go six months back up, we get a little a cup and a little handle off of that bull flag, and we'll see.

Chris: Yeah. I think late this summer, we're going to be flirting back up near these highs. I think it's going to be a choppy ride, but overall, I think they're on the cusp here. They're starting to break out and they're showing signs of strengths, they're showing signs of early leadership, but they're not really the leaders yet. So, definitely something to keep our eye on because there's going to be a time when you really want to get into these gold miners, even if you're not in them yet. It's going to be the point to get in because a lot of these miners could be absolutely golden rocket ships that can go straight up if we do get that big run in gold and the miners, in general, they're going to have huge runs. So, they're coming into favor it looks like.

Craig: Chris, in our remaining time, let's focus on silver and gold. Let's start with silver because I want to spend a little more time with the gold chart at the end. You know, it's banging around. I've yet to see, I guess for me, I'm waiting for a weekly close north of $28,000. Something I've been, kind of, holding onto and waiting for. The action here this week I thought is interesting though, on the very right-hand side of your chart, in that we kind of came down at the end of March, as you can see with that green line, flushed everybody below the 200-day, it looked like, "Oh God, now we're doomed." And instead, we reversed and then came back and held the 200-day of support, and then after struggling to get above the 50-day for about 2 weeks, earlier this week, right at really the convergence of those two lines, we sprung forward to a new high versus, I mean, we had a new closing high that we hadn't seen since the end of February, so 2 months. Early stages, I think that looks interesting. What are your thoughts?

Chris: Yeah. I think the silver and silver miners have a very similar chart pattern. They're stuck in a really big range here. I mean you look at this noise, it's big and it's almost dead center in the range. So, it's a 50/50 which way this is going to go. It's definitely trying to have some upside moves. We haven't seen huge buying volume really step in, but overall, the short-term trend here is up. We're above the key moving averages. We've broken this previous high over here. So, it definitely is showing signs of life. You look at silver and silver miners compared to gold and gold miners, silver has been trading sideways. It's been holding up. It's actually got a much higher relative strength than gold and gold miners. So, when silver and the silver miners break out, they could have a lot more explosive potential than the gold miners. So, that's why I liked them. You usually want to stick to the leaders, they're ones holding up the best, and that means when the market becomes favorable for those particular assets or equities, those ones that held up well because people kept accumulating are going to just really float into outer space once they start that trend higher. So, I really liked silver and silver miners for that reason.

Craig: You know, and I might add, you know, a lot of folks on my site often ask, you know, why do we care about the technical analysis and the price when we're mainly stacking physical? And here, you and I are on a site for physical metals, Sprott Money. But this is important because, you know, if you track this kind of stuff and you know you're going to be in the market to say even just buy one tube of Eagles or Maples, and you look at that chart and you think, well, geez, maybe by a month from now, we could be talking $28 or even just a couple of weeks from now. Geez, if that's the case, you could buy something today and maybe save yourself 30 bucks.

Chris: Yeah, exactly. I mean, look at this chart, long-term chart of silver. I mean, this is the ultimate, you know, bull flag. We have this massive rally, the flag pole. We've got this flag, price flagging out. And a flag pole or a bull flag is considered the halfway mark of that move. So, just to throw using momentum here, we can go from the low to the high over here, and bring it back down to these lows across here, and you can see the upside potential when I squish this chart down. And so, as a long-term investor, you look at this gold or silver broke into a bull market, it's formed this beautiful flag, a very big flag and flag pole. And it's got upside potential from where we are right today, I mean, of 51% based on this pattern. So, if silver can move 51%, you can only imagine what the miners are going to do. They're like 5X, 10X, you know, some of these moves. So, it's pretty crazy, the potential here. When we go and, like, take a look at gold, for example, it's a little different, it's pulled back a little deeper. It doesn't have nearly as much percentage-wise to the upside, which we can shift over to gold if you want to here...

Craig: Yeah. Please.

Chris: ...and look at gold. So, when we look at the gold pattern here, we've got this, kind of, big pattern in this pullback and the upside potential in gold just isn't quite the same. We could go all the way from the bottom over here, we could go to the top here, and down to this recent low, and more or less the upside potential here is roughly $2,500, $2,600 depending on where you want to pick some of these lows. Maybe you want to start over here, maybe over here, but I was actually talking with subscribers about where do you pick your bottom for these bull flags? And typically, you want a chart pattern to be equally weighted. You generally, for example, don't want to say, okay, well, this move here is the flag pole and then this is the flag because they just are not in sync. Obviously, this flag, when there's no momentum, is going to be hanging on the ground if you look at it that way, you need to match the size of the consolidation with more or less the momentum going back in time that would match it. So, you could use a low here, you could go back here, or you could go right down to the bottom where the precious metals really, kind of, found it, and then you could go from there. So, you definitely want to make sure it's weighted.

Another way to think of it is when you're looking at a head and shoulders pattern, we're usually looking at, like, a nice somewhat organized head and shoulders pattern. And then you're going to have this neckline across here that when you break that neckline, typically the distance between the high and that neckline is how much it's going to drop. So, you just, kind of, take this distance here and you would just drop it through that neckline and give you an idea of where that price momentum should, kind of, shift. So, that's kind of one way to look at this pattern is we can go way back in time, we got this big bull flag, kind of, flagging out, and it looks like it's starting to get some traction to the upside. And obviously, percentage-wise, if we were to just take a look, you know, it's 43%. I mean, that's a huge percentage gain. Not as much as silver. I don't like the gold pattern quite as nice as the silver one. I think it's got a lot more potential and oomph behind it, but I mean, gold and silver are definitely both flagging out in a big way.

Craig: So, then I guess in our final question, Chris...because again, this is the art of what you do, and any real good technical analyst is really an artist. I mean, it takes wisdom, experience, you gotta know what you're looking at and know how to apply it. So, my question then is how do we measure...if everybody's waiting for the breakout, right, to say, look, look at that beautiful little double bottom, you know, the bond market's rallying, real interest rates are negative again. You know, we got all these things that you would think, you know, going into seasonal time in summer, you know, we're going to have a nice summer rally. So, how do we know it's begun? Well, it's a breakout of some kind, right? Is it up above that 200-day moving average or the 50-week moving average? Is it out of the bull flag? Where do you draw the bull flag? You want to just, kind of, have some fun with that and our remaining time?

Chris: Sure. Yeah. Well, we can draw something like trend lines where we can try and figure out where price is going to break out of this pattern. So, there's a lot of different ways. Everybody's got their own way. Every technician usually got their own little bit of a tweak, but there's a few, kind of, basic ways that I always draw trend lines just to get an idea of where resistance and support levels are going to be. So, typically, the most extreme level is defined where you can see really clear standout highs on the chart, and you want to usually take those candle highs and you can draw that first resistance trend line. So, that's like an extreme. If price was to rally on one day based on news or something down here, we see it go all the way up. If it's a news-based move, some type of blow-off exhaustion, something is not making the market move more than normal, then you'd definitely be like, okay, well, if it gets to this level, it's most likely going to fizzle back out. That's what happens on a lot of these other ones. They happen to be news, some type of blow-off event happens that causes a wave and creates this giant surgeon reversal. So, that's, kind of, the most extreme line.

And then you could go based on a bar opening or closing. So, you want a piece of the body. So, you go from the body point and you've got another body here and you just drag those across those bodies, and it'll give you an idea of where that next, kind of, tighter trend line is. And as you can see now, we're getting a lot closer to physically having a body break through this wall, this falling trend line. And so, that is a more solid...it's definitely a tighter way to get in sooner. And obviously, they can close above that. That'll be the first time in all of these months that it will actually have a body, a day that closes above it. So, it's like gotten through, think of it as a wall and you've got your body through the wall, you now have just gone through that resistance level. And so, that's how I look at it. So, when a body closes above that trend line based on this type of analysis, you've broken resistance. You're through that level. So, we're really close with the gold miners.

Those are like the two, kind of, basic ways that I look at it. Sometimes I base things off of two bars. I want to make sure two bars are going to be hitting wick or my trend line. So, I got a bar there, this wick touches here and I'll carry it through and I want to make sure I bring it all the way down. There's always going to be two bars touching it. And, for example, if I was to just draw on here, we've got a bar...let me just grab the pencil. We got a bar tagging here. We've got one tagging right there. We've got it hitting here. We've got it hitting there. We've got a bar touching there, there, this one went through it in reverse. We've got two bars touching it here. And we've had you know, two bars tagging here and today...or sorry, this is a weekly chart, this week, we're actually breaking through that one. So, as you can see, like, we're in the cusp of breaking out on this theory of a breakout for gold on the weekly chart. And technically next week, if we close a little bit higher, we'll break through a different type of resistance trend line which will give us more confirmation that, hey, this is actually muscling its way up through sellers. If there's people buying it and holding it. And it could be, you know, on its way up to this 20-day moving average...or sorry, the 50-day moving average in this blue line.

Craig: Which would be nice. Now, the flip side of that, just as we wrap up, still making lower highs and a bear can say, "Yeah, that looks like a little bear flag that we're in here for the last two months." Is there something you worry about a level on the downside, a $1,720 or something like that? Is there something that would make you go, "Oh boy, yeah, that was a fakeout?"

Chris: Yeah. There is that for sure. If we were to take a look at just this recent, kind of, sell-off using a Fibonacci, kind of, momentum move, if gold stalls out at resistance...which this is resistance. We've got price trading right across this level here, very significant, kind of, resistance level. It goes right across over here as well. So, it's at price resistance. It's also at trend line resistance I just showed you. And based on this pattern here, we've got the sell-off, we've got this bear flag that you just mentioned into resistance, and then we've got potential down to $1,620 and then all the way down to potentially the $1,500 level mark. So, that's where it could potentially flush out to.

Overall, to me, it would be a very strong pattern still. I mean, we'll be coming down to the 200-day moving average. We'll be coming to the COVID low, this other consolidation. Ideally, I don't want it to go that far. That's getting a little bit long in the teeth. That's not a bull flag anymore. It's in a full-on, kind of, downtrend and selling off and it'll probably take a lot more work to build a base and then get back out of this. So, the further it goes down, it's a bigger hole it's digging itself to try to get out of. So, we really, kind of, want to see this breakout here and move higher, or else we are months and months, kind of, setback before the next breakout.

Craig: Yeah. Nobody wants that. Oh my gosh. Yeah, after the seven or eight months we've already been through, that just wouldn't be any fun. So, I suspect that sets us up for next month's "Precious Metals Projections" because by the time we roll around early June, it'll be very interesting to see if we've made any progress, if we've resolved some of these things to the upside or not. Chris, it's just always great to visit with you. It's just fascinating stuff. And I'm sure everybody listening appreciates all that you've added today and you've given a lot of stuff to chew on. And if you appreciate it, man, throw Sprott Money a bone. I know there's all kinds of choices out there if you're in the market for physical metal, and why aren't you? You should be.

Just make sure you check Sprott metal, check their pricing, check their product availability, the friendly service. Again, you can do it through the website, sprottmoney.com. And, of course, you know, you can always just pick up the phone, give them a call. There's a friendly sales staff to help you out, kind of, talk you through. If you've never bought precious metals before, they'll tell you how it works. And that number is 888-861-0775. My friend, Chris Vermeulen, thetechnicaltraders.com, it is just so invaluable to sit and listen to you. Thank you so much for your time again this month.

Craig: Yeah. Thanks for having me, Craig. Take care.

Chris: From all of us at Sprott Money News, sprottmoney.com, hey, thank you for watching, and we'll see you again in June.