Gold and silver prices are at a significant crossroads. At this point, the long-term outlook remains bullish but continued short-term selling provides clues that the rally that happened in 2016 was a “false start” and gold and silver could be heading into a long-term range or a continued downtrend.

First, a little background. I own several gold and silver (and other precious metal) stocks that I started accumulating in late 2016 once gold and silver had pulled back significantly from their earlier rally. The rally in gold and silver was interesting, but on its own was not enough to spark my interest in buying either of these commodities. What was interesting was how much gold and silver stocks had sold off from the 2011 peak. While gold declined about 45% from its 2011 peak, and silver declined 72%, gold miner stocks had dropped on average 80%, silver miners 84%, and junior gold miners lost 90% of their value since 2011. Therefore, it was the combination of very depressed gold/silver stocks, plus the 2016 rally in gold and silver that led me to accumulate some position in the stocks (around November/December, on the major pullback). Therefore my analysis is based on being a gold/silver stockholder, and not necessarily trading the commodity itself (which I do swing trade when the right opportunity comes along).

Long-Term Outlook on Gold and Silver (and associated stocks)

I see two probable scenarios in gold/silver right now: an uptrend or a range.

Gold and silver both rallied aggressively in 2016, breaking out of the multi-year downtrend. That indicated that buying on a pullback was a good idea because if this is an uptrend the price structure unfolds in an upwave, pullback (where we are now), upwave, pullback, etc.. So the expectation is for another rally to the upside, taking the price above the 2016 highs.

Figure 1. Gold Continuous Futures, Weekly Chart

There are a couple issues, though. The decline (following the rally) between July and December retraced more than 75% of the 2016 up-move. Typically we don’t see that deep of a retracement in gold following the first leg up in an uptrend. That opens up the possibility of a 1980s and 1990s scenario where the price rallies and then falls back toward recent lows, forming more of a big range than an uptrend (although, we can still have small uptrends–like the 2016-rally–within the range). Silver had a similar structure at that time. These ranges can last well over 10 years.

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