While there is no such thing as a certainty in market analysis, we have to base our analysis upon probabilities. Last week, in a note to clients, I said silver had entered a profitable buy window and could rally from that point. However, I also highlighted the following:
“We also need to be aware that a break of the $17.30 – $17.50 support region could create at least some short-term weakness before finding a more permanent bottom from which to stage the next upleg of the bull market.”
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As you can see above, Silver has now been down 13 straight trading sessions and corrected nearly 13% in the last 2 weeks. Comparatively, Gold has dropped only 4.5% in the same time period, which right now is suggestive that the volatility seen in silver is over-exaggerated rather than suggestive of further declines.
Silver is now severely oversold so a sharp reversal to the upside could occur in the very near future. RSI is at a staggering 16.23% [highlighted on chart above]. An RSI so low is rarely witnessed and suggests extremely oversold short-term conditions. The CCI is further supporting this thesis with a reading at -106.52 [highlighted on chart above].
In fact, the last time these technical indicators were so skewed was when silver was bottoming in late 2015, a level from which it then rallied 50% over the following 6 months.
The Gold / Silver Ratio Is At An Extreme Level
The current gold to silver ratio is at 75 to 1. By historical standards, this is extremely high. Furthermore, the last time this ratio was so high was May last year. Following this, silver exploded higher, surging from $16 to $21 in approximately 2 months. This expansion concluded in a ratio of 65.5 to one in July 2016.
Silver has had a severe correction over the last two weeks, admittedly more than I would have liked to have seen. Nevertheless, it has brought the market into oversold levels not witnessed since the bottoming process at the commencement of the commodity bull market in late 2015. In such oversold conditions, with favourable gold/silver ratio factors, it is likely that a major rally could begin to take shape in the immediate future.