Commodities | 11:44 AM
Carley Garner (DeCarleyTrading.com) explains why she believes the present investor mania in gold and silver is likely to end in tears, exact timing unknown.
Quick thoughts on Gold and Silver
By Carley Garner, DeCarleyTrading.com
The last time silver behaved like this, the market was being cornered by the Hunt brothers. This time around, we are likely seeing something similar, but the culprits aren’t identifiable siblings.
In addition to momentum traders who have piled onto the trend, it is likely that governments took note when the US froze Russian assets on the heels of their invasion of Ukraine.
In some cases, wealthy oligarchs with loose ties to Putin discovered that using the dollar as a reserve currency came with consequences.
For instance, nations that aren’t on the US favored list, such as China, might not be comfortable parking money in the dollar and likely don’t trust currency deposits backed by other nations either; gold and eventually silver were the beneficiaries.
Although we tend to assume that central bankers are smarter than the rest of us, they make mistakes too. In 2020, Central bankers and the public were flocking to US Treasuries with reckless abandon, much like we are seeing in precious metals today.
Six years later, it is clear that locking in US-issued securities with a duration of 20 to 30 years at yields below 1% wasn’t the right move, but at the time, it seemed like the only move to the majority.
In addition to the obvious bullish factors and bandwagon trading, I believe commodity ETFs (Exchange Traded Funds) are the cigarettes of the financial industry. They are addictive and harmful, but the habit is hard to break.
We seem to have learned nothing from previous debacles of trying to stuff “viral” ETF liquidity into relatively small commodity markets. Even a toddler knows that if you try to stuff something large into something small, things break.
In short, just because everyone in the world wants to have exposure to a particular commodity doesn’t mean there is enough to go around without completely distorting price discovery.
In my opinion, the increasing popularity of ETFs has wildly exaggerated commodity boom-and-bust cycles; I believe this at least partially explains what we are seeing in metals today.
Commodity market trends often culminate in a large spike in volatility as traders on the wrong side of the trade capitulate in both the futures and options markets, and latecomer FOMO traders finally pull the trigger.
The CME Group’s CVOL index for silver, which can be viewed similarly to the VIX, reflects stock market volatility. According to the volatility index, silver option market volatility surpassed that of the COVID crisis and the metals peak of 2021. Those two volatility spikes were trend killers.
It takes a 50-year silver chart to get a clear look at what is going on.
When the Hunt Brothers successfully cornered the silver market, we saw a bull market start near US$5.00 and eventually end at US$50.00 (10X).
In late 2003 and early 2004, another bull market picked up steam from roughly US$5.00 and didn’t end until prices had gained 10X in 2011, driven by a historic explosion in market volatility and frantic buying of gold and silver in hopes of hedging against the impact of the Great Recession.
Even the largest financial crisis of most of our lives wasn’t enough to trigger the same type of price appreciation we are seeing today without a recession.
Perhaps the metals are front-running an economic implosion, or perhaps central bankers are unintentionally, or intentionally, cornering metals markets due to the sheer size of buying in metals markets that aren’t as deep as some assume.
The next historic volatility spike occurred in 2020, as news of a global pandemic spread; this marked a bottom and the beginning of a bull market that ran out of steam a year later after reaching US$30.00 per ounce.
This intermediate market top was also accompanied by a volatility explosion in the option market. If you believe the bull market started in 2020, which posted a messy low near US$11.50, a 10X rally would leave us somewhere between US$110.00 per ounce and US$120.00 per ounce.
Silver market volatility has been stunning. The last three-monthly price bars have traded almost entirely above the upper Bollinger Band.
The bands represent 2-Standard deviations from the mean.
According to traditional bell curve statistics, prices should trade within the band roughly 96% of the time. In markets, fat-tailed events are more common than they are in other parts of life, but this is a highly improbable event.
In fact, the January monthly bar qualifies as a 3.5 standard deviation move, which, in traditional bell curve statistics, is a once-in-175-year move.
Given the emotional financial markets, we can assume it is a once-in-a-50-year move. The only other time in history we have seen a move of this nature was at the hands of the Hunt Brothers’ squeeze in 1979.
We don’t know when or where the silver rally ends, but we have a pretty good idea of how it will end.
The RSI (Relative Strength Index) is hovering at 94.00 on a monthly chart, which is rare. Even the 2011 silver parabola only achieved an RSI reading of 86.0.
However, in the current metals market, RSI is meaningless until it isn’t.
As depicted on the previous chart, if we repeat the pattern of multiplying the price at the beginning of a silver bull by ten, we will see buying dry up somewhere in the US$110.00 to US$120.00 area.
However, there is a monthly trendline that comes in close to US$135.00, a price that would have been considered impossible just a few months ago.
When the 2011 silver bull market ended in a volatile fashion, it fell back into what had previously been a comfortable trading channel (blue lines). If that happens again, we would be looking at silver falling into a range between US$40.00 and US$19.00.
If US$40.00 sounds low, keep in mind we were just there in early September of 2025; it isn’t impossible to see a complete retest of the breakout.
If we go into a bear market, US$19.00 silver could be seen. If this time is truly different, meaning this is a new global paradigm in which cash is parked in hard assets rather than fiat currency, psychological support at US$100 and the upper Bollinger Band near US$78.00 should reject selling.
Gold volatility is similar to silver; for this market, we have data dating back to the financial crisis. Current gold market volatility matches the 2011 peak, which triggered a nearly -50% correction and a decade of languishing prices.
It moderately surpasses the 2020 volatility spike that set gold back about -25% over the next four years.
The only occasion over the last 25 years in which gold volatility was higher than it is now was the financial crisis. On that occasion, gold bottomed and rallied to a late-2011 top.
In short, history suggests this type of volatility is indicative of an imminent trend reversal, not its continuation.
Like silver, the gold RSI is in the mid-90.0s and hasn’t mattered. In fact, traditional technical analysis simply hasn’t worked. The gold market has melted through price levels that chartists would normally rely on for higher probability trades.
Once gold broke its trendline at US$2,900, nothing has been able to stop the momentum. A multi-month pause near US$3,550 proved to be a launching pad for a run to the final trendline that dates back to the early 2000s; this trendline comes in at US$5,100, roughly Monday’s high.
If the metals have a chance at turning the corner, this is it. Multi-decade trendlines, historic explosions in volatility, and a nearby expiration of the February futures contract are all potential catalysts for a sanity-saving correction, or even a top.
Yesterday, traders were spending US$5,000 to US$10,000 on wildly out-of-the-money call options expiring the next day, and US$50,000 to US$60,000 on distant out-of-the-money call options expiring next month.
The most liquid options months are seeing the most strikes, with bid/ask spreads of 1 to 3 dollars (US$5,000 to US$15,000).
The metals markets are behaving like we are in another global financial crisis.
Are they front-running something, or is the market being essentially cornered by Central bankers who have little regard for price and fickle, yet aggressive, ETF inflows?
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DeCarley Trading (a division of Zaner)
Twitter:@carleygarner
info@decarleytrading.com
www.DeCarleyTrading.com
www.TradingCommodityOptions.com
www.HigherProbabilityCommodityTradingBook.com
Re-published with permission. Views expressed are not by association FNArena’s.
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