The precious metals sector is correcting and consolidating as predicted, although some parts have been buoyant in recent days. Silver is one of those parts.
The immediate question is whether a new leg higher starts or if recent strength is a bounce within a larger correction and consolidation. If you are fully invested or close to fully invested, then the answer is immaterial.
I’m far keener on various sector ratio charts and the potential implications for the future.
We know that precious metals are in a bull market.
Gold recently made a new all-time high and is stable around past all-time high resistance while Silver is trading at an 8-year high.
The gold miners and junior gold miners broke out from 7-year resistance in recent months. Plenty of upside potential remains and especially for juniors and explorers.
Various ratio charts signal the potential for a broader shift to take place over the quarters ahead.
Take a look at these ratios involving Gold, GDX, and the stock market.
These ratios are setting up for potentially huge breakouts in 2021. The implication is gold stocks would strongly outperform Gold, which would outperform the S&P 500.
As evidenced by GDX and the HUI, the gold stocks have not outperformed Gold consistently since the mid-2000s. A breakout in the GDX to Gold ratio suggests the potential for sustained outperformance from the gold stocks.
Meanwhile, the Gold to S&P 500 ratio, upon a break past 0.70, has a measured upside target of nearly 1.00.
The larger implication of a breakout in these three ratios (which certainly could happen at different times) is the potential for precious metals to become the go-to asset class to the detriment of equities. In other words, capital would move out of the stock market and in favor of Gold and especially gold stocks.
I do not think a breakout in these ratios is imminent by any means, but it is something to keep on your radar concerning the next 6 to 12 months.
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