Did Gold & Silver Just Peak?

After its white-hot run, the precious metals sector has become a bit overheated and is likely due for a healthy short-term pause, which should be welcomed.

After hitting one new high after another, gold, silver, and mining stocks took a breather today. Gold slipped 1.62% to close at $3,976.24, while silver managed to finish up 1.05% at $49.39, though still well below its earlier intraday high of $51.24. None of this should come as a surprise or cause for alarm. No asset moves straight up forever.

In fact, in my recent writings I have repeatedly noted that, despite my strong bullish outlook for the broader precious metals bull market, gold and silver have become overheated in the short term. A shallow pullback or period of sideways consolidation here would be both natural and healthy, allowing them to cool off, reset their overbought conditions, and build the base needed for even greater gains ahead.

On October 3, I said that silver was likely to pause just below its critical $50 psychological level. Rather than crashing, I expected a healthy, shallow pullback or brief consolidation that would allow it to gather strength before ultimately breaking through the $50 level that capped its rallies in 1980 and 2011. I recommend revisiting that piece to read my more detailed thoughts on the subject.

Here’s a relevant excerpt from that piece:

Now I want to say that I adamantly believe silver is going to surpass $50 and go much higher from there in the near future. However, there is something I want to point out. Because silver has surged so strongly and so quickly, it is a bit extended in the short term, which makes it likely that it will consolidate or pause before eventually breaking through $50. Evidence of this can be seen in the Relative Strength Index (RSI) momentum indicator, shown in the chart below, which provides overbought or oversold readings for assets. I respect what it indicates.

That being said, unlike many amateur investors and analysts, I am adamant that an overbought reading like the current one in silver is not an automatic signal to sell or an indication that the bull market is over. I recommend reading my tutorial on this topic to learn more. There is a very high likelihood that silver will experience a shallow pullback or move sideways for a time to work off its overbought condition. This would conserve energy for the next leg higher, when silver smashes through the $50 ceiling.

In that piece, I showed the long-term chart of silver and explained the importance of the $50 level, which capped the rallies in both 1980 and 2011 and led to sharp declines afterward. Once that level came back into play recently, I pointed out that it would be critical to watch how silver reacts there and that a brief pause or hiccup was likely before it ultimately breaks through (and I expect it to break through this time around).

Now let’s take a look at the daily chart to see how silver behaved today at that critical $50 resistance level. Early in the New York session, it made a sharp attempt to test that level but failed to close above it and then pulled back.

I’m not at all surprised by this since it’s exactly the scenario I was expecting. Everything is unfolding according to the playbook I’ve been following, which is reassuring. I always prefer when the market behaves as I had anticipated rather than catching me off guard because it reaffirms that I have a solid understanding of the mechanics of the market.

Next, let’s look at the intraday chart so you can see how silver almost exactly touched the $50 level before failing there and selling off about $3 an ounce over the next few hours. That is a textbook example of how key technical levels work and why everyone should pay attention to them.