We have been closely monitoring the precious metals complex last week as they are clearly attempting to make a huge breakout.
All conditions are currently in place to support a strong breakout. First, the U.S. dollar is not quite as strong anymore, providing relief to commodities. Moreover, leading commodities are showing signs of selling exhaustion. Combined with an outspoken fear from the U.S. Fed to hike interest rates, it seems clear that precious metals, being the first commodity to collapse 2.5 years ago, are ripe to break out of their 4-year downtrend.
The following chart, courtesy of Short Side Of Long, shows that silver has already broken out from a major 3-year declining trendline. Silver has a track record to lead the precious metals complex. Gold and the miners are still "pressing against their downtrends, just like gold itself," writes Short Side Of Long.
Is silver's early break signalling a trend change? Or is this simply another false breakout, as we have witnessed quite some over the last years? Given the above conditions, we believe there is a fair chance that this breakout is for real.
And here is the scenario we believe will play out:
All precious metals and the miners will break out in the coming weeks, taking out the January top, but the rally could stall somewhere near the top of last summer. Next, the excitement will fade, as the breakout point will be tested in 2016. Obviously, media and gold disbelievers will be pretending that the yellow metal is set to collapse again (below $800 /oz obviously), but at that point we believe the breakout will hold.
If the scenario plays out as we described, then the retest in 2016 will be THE last chance to jump into this sector at these low prices.