Will FOMC and GDP be the spark?
This article first appeared on SchiffGold.
The price analysis two months ago concluded that a neutral market had been found between $1800 and $1850 and was waiting to see a break of resistance or support. It leaned bullish with indicators showing the down move had run its course but it also highlighted the risk that a drop below $1800 and $1750 brings $1680 into play. Last month concluded that even though gold was still trapped between $1800 and $1850 it had built up solid support. Unfortunately, gold fell through the trap door at $1800 and tested $1680 this week. Has a bottom been found? Too soon to tell, but a look at the indicators could give some clues.
Gold
Gold has fallen through all levels of recent support and even tested strong support at $1680 this past week. It managed to close above $1700 each day though and more signs of economic weakness has produced a bounce to $1725. $1750 could prove strong overhead resistance after such a long consolidation above that level in 2021, so gold seems a bit trapped between $1680-$1750 and really needs to take out $1780 for a bullish signal. For now, momentum is down.
Outlook: Neutral to Bearish
Silver
Silver also fell through a trap door at $20 and closed as low as $18.22. Last month did highlight concern in silver and identified the potential for weakness. That being said, an 18-handle looked improbable. Similar to gold though, it fell through several levels of strong support which turns all of those into resistance. $20 is the next major hurdle for silver to regain momentum.
Outlook: Neutral to Bearish
Figure 1: Gold and Silver Price Action
Gold
The 50 DMA ($1806) crashed through the 200DMA ($1842), to create a death cross. This is a bearish indicator, especially with gold sitting comfortably below both levels at $1727.
Outlook: Bearish
Figure 2: Gold 50/200 DMA
Silver
Silver formed a death cross back on June 1 and has responded in kind with very bearish price action. The 200 DMA at $23.07 is well above the 50 DMA at $20.78. The price is well below both averages at $18.62. Momentum is down until these numbers turnaround.
Outlook: Bearish
Figure 3: Silver 50/200 DMA
Gold
Margin rates fell on July 11 from $7500 to $6500. This typically increases spec positioning in the market which will push prices up. This means lower margin rates are a bearish indicator as the CFTC can increase rates to blunt any price advance. However, in this case, the fall in margin rates has increased spec positioning on the short side. This can be seen in the CFTC COTs report with managed money going net short in the futures market for the first time since April 2019.
The recent increase in open interest has been driven by shorts, not longs. Managed money longs have been mostly flat since May. Banks typically take the other side of the Managed Money trade and are much better capitalized. This means any increase in margin will force liquidate the short side putting upward pressure on prices.
Outlook: Bullish
Figure 4: Gold Margin Dollar Rate
Silver
The same situation is playing out in silver. Spec shorts have piled in with longs remaining low and flat. An increase in margin could force liquidate shorts.
Outlook: Bullish
Figure 5: Silver Margin Dollar Rate
The gold miners have been very consistently leading the price of gold in both directions. The big fall in miners preceded the latest move down. This created a conclusion last month of “Either Bullish Miners or Bearish Gold”. Unfortunately, the metal is still following the miners and gold fell through the floor. In the latest week, the miners have had trouble gaining traction, even while gold rebounded. The miners followed the stock market lower on Friday even while gold had an up day. Until the miners can gain traction and start powering higher, momentum in gold is clearly down.
Outlook: Bearish
Figure 6: Arca Gold Miners to Gold Current Trend
Looking over a long time horizon, shows how badly the miners have underperformed gold over the last decade. This shows traders have never confidently bought into any gold momentum, anticipating price advances will be short lived. When this trend reverses, gold could start flying higher being led by a surging mining sector.