The stock market took a hit early this week while precious metals rallied. As tensions rise at home and abroad, investors are looking for safer places to park their money, and some of their first choices are usually gold and silver. But before you start shifting assets into these so-called safe-havens, it's important to look at all the risks that accompany any potential upside.
A close look at the iShares Silver Trust ETF (SLV) shows the possibility of a major breakout above a downtrend resistance line from the middle of 2016. As the SLV breaks above $16.50, which it did last week, it has taken out a resistance level that it has touched and failed at multiple times. The breakout is notable given how long this resistance level has remained intact.
From a trading point of view, if one were to compare SLV with the SPDR Gold Shares ETF (GLD), one would see there is more room to the upside in SLV. That's because GLD is only two percent from its 2016 high, which means it is more likely to find resistance soon. But SLV has more than 20 percent to go before it hits its 2016 high.
GLD and SLV have a positive correlation since they are both seen as hedges in the market and react in a similar way to monetary policy and inflationary data. But it is important to realize that SLV has historically been more volatile, so in times of peril, a safe investor is more likely to choose GLD to avoid these larger swings.
There are two glaring risks to trading GLD or SLV for continued upside. On a technical basis, the recent rally has made both assets overbought on a relative strength index basis (RSI). Whenever the indicator is close to 70, that's a sign that the asset is overbought. And on a fundamental basis, if international tensions with North Korea subside, or if domestic political strife eases, investors are less likely to continue piling into safe assets like GLD and SLV.
The Bottom Line
After a technical breakout above long-term resistance levels, both Gold, represented by GLD, and Silver, represented by SLV, look poised for more upside. But given their short-term overbought technical state, the fundamental story of increased political tension domestically and abroad must continue for these assets to keep rallying.
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