Precious Metals Have a Problem

Everything seemed to be working in January. US stock prices jumped 6%. International stocks were up even more. The bond market rallied, cryptocurrencies ripped higher, and gold prices soared. Even Bed, Bath & Beyond, a company on the verge of bankruptcy filing, managed to turn in a positive performance. No matter where you put your money, you probably had a good month.

Unless you put that money in silver.

It’s not like silver had a bad January. Prices for the popular precious metal fell less than 1%, a fraction December’s 8% gain. But in a month where just about everything else was in rally mode, silver was notably absent from the party.

It was a sign that not all was right in the world of precious metals.

Silver and gold tend to be highly correlated, but silver tends to move in greater magnitudes. When the precious metals space is under pressure, silver tends to lag, and vice versa – in a bull market, we should expect silver to outperform. When that isn’t happening, we need to pay attention.

Last fall, when gold breaking to new 52-week lows, silver failed to do the same. Instead, it kept setting higher lows. That was a great signal for what was ahead: in the following weeks, gold reversed its losses, and both metals ripped higher.

This time we’re seeing the opposite. Gold rallied in January, but instead of leading like it should have during a bull market, silver never confirmed that strength. That turned out to be a pretty good signal once again: silver dropped 6% to start the month of February.

That weakness bled over to gold, too. On Friday, the yellow metal had its worst day since last July, dropping 2.4%. It’s still higher on the year, but more than half its gains have been erased in February.

That’s not the only place we’ve seen a major reversal. The US Dollar Index is working on what looks to be a failed breakdown below a significant support level.

Commodity prices tend to be negatively correlated with the Dollar, and Dollar weakness has been a big tailwind for the rally that started in October. Just last week, it looked as though the DXY had even further to fall when it dropped below its 2020 peak and into the 5-year range that contained the index from 2016 to early-2022.

Momentum, though, was telling a different story. Even as the Dollar tumbled 12% in just a 4-month period, RSI never fell into oversold territory. That underlying strength became an outward display of vigor as last week came to a close. From Thursday morning to Friday afternoon, the index jumped 2%, erasing nearly 3 weeks of declines in just over 24 hours.

If that Dollar strength continues, it doesn’t bode well for precious metal bulls.

It could be a problem for stocks, too – the Dollar drove stock prices all throughout 2022.

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