The long-awaited breakout in gold and silver may finally be upon us. 

The gold market had been knocking on the door of the $1,800 level for the past three weeks. On Thursday, prices pushed strongly above that resistance line to close at $1,822 an ounce.   Turning to silver, the white metal has surged 6% higher this week, poking above $27 per ounce. 

Although silver prices traded up to the $30 level briefly in early February, a sharp selloff followed that caused the market to put in a significantly lower close for that week.

Some long-term traders prefer to follow weekly rather than daily technical and momentum indicators. 

A decisive move above $30 an ounce confirmed by a weekly close would be hugely bullish. It would represent a breakout from the consolidation pattern that has formed since last summer. It would also establish a fresh new multi-year high for the precious metal.

When silver is ready to run, its rallies can be fast and furious. So, a rapid move to new all-time highs above $50 can’t be ruled out.
 
But the market will ultimately move at its own pace, so having a long-term time horizon is the best way for investors to avoid missing out on the next big move.

Precious metals markets will lift over time with the rising tide of inflation. Recent trends show inflation running hotter than it has in years. 

In recent days, officials at the Federal Reserve and Treasury Department have gone out of their way to downplay the inflation problem. They insist inflation pressures showing up in the economy right now are “transitory.”

But the trillions of dollars in new spending, borrowing, and currency printing coming down the pike from Washington will have long-term consequences. 

The Treasury Department recently reported it expects to borrow $463 billion in the current quarter – far more than previously expected. The new spate of Biden borrowing will spike the federal budget deficit to $2.3 trillion. All in a single year. 

Treasury Secretary Janet Yellen says not to worry, though, because the Fed has everything under control.

Financial News Anchor #1: US Treasury Secretary, Janet Yellen, tamps down concerns that President Joe Biden's plans for infrastructure jobs and families will further stoke inflation.

Financial News Anchor #1: Well, now the Treasury Secretary says she does not anticipate that inflation will be a problem in the U.S. economy. Treasury Secretary Yellen also saying, "Aside from some transitory," that's the Fed's word, "increase in inflation in coming months, I don't think there's going to be an inflationary problem. The Fed has tools to address them."

Janet Yellen: The Federal Reserve has the tools to address inflation should it arise. We will monitor that very carefully. We're proposing that the spending be paid for. And, I don't believe that inflation will be an issue, but if it becomes an issue, we have tools to address it.

The Fed may have the tools to keep inflation in check.  It could cease making asset purchases, jack up interest rates, and curtail money supply growth. At least in theory. 

The real question is whether central bankers would actually have the will to do what’s necessary to bring down rising prices. Their current stated objective is the opposite – to raise inflation rates above 2% for an extended period.

The risk is that inflation overshooting their target, putting policymakers in a precarious position. Would they take away the punch bowl?  Would they be willing to inflict financial pain upon Wall Street, the big banks, and the U.S. government itself?  

Without the Fed’s low interest-rate stimulus, markets could collapse. Government borrowing costs could become unmanageable, sparking a sovereign debt crisis.

Treasury Secretary Yellen and Fed Chairman Powell know full well that the entire house of cards could collapse without the benefit of negative real interest rates. They may not say so publicly, but officials in Washington are effectively banking on inflation to bail themselves out in perpetuity. 

If wage earners, savers, and retirees who earn and hold dollars suffer in the process, then so be it.

In this environment where the entire financial system is artificially propped up, bubbles never fully burst. Instead, they are constantly reinflated on a rotating basis. 

It won’t always be the stock market that is the top performer. At some point, inflation fears may drive mainstream investors to make dramatic moves to try to protect themselves. 

The biggest rotation of all could be from dollar-denominated financial assets into tangible assets including physical precious metals. 

In recent days, we have seen signs of such a rotation. Some of the hot stock market sectors from last year including biotechnology, internet, and innovation plays have sold off. Meanwhile, inflation plays including energy and metals are showing impressive relative strength.

While gold and silver have lagged most of the year, they have tremendous upside potential at these levels and may just now be getting warmed up.
 

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