A sizeable rally now needs time to consolidate
This article first appeared on SchiffGold.
The price analysis last month suggested that more time was needed for a sustainable rally. It concluded:
It looks like this market will turn sooner or later. Still though, support has become resistance so the market has some work ahead of itself. Medium to long-term investors should feel very confident buying at current prices, even if the price action remains choppy in the short-term
The metals market saw a strong bounce in the wake of weaker than expected CPI even though inflation is still annualizing more than 5%. The assumption is the Fed will tone down the aggressive talk. The market is now back in the lower side of the range it was stuck in for months ($1750-$1800), finishing the week at $1752. A look at the data can provide hints as to whether $1750 can hold.
Gold
Gold was recently trapped below $1700 after carving out very solid support at the level for the past two years. Regaining $1700 is a positive turn, especially with the explosiveness of the move. That said, $1800 has proven to be a much harder hurdle to hold above. At $1750, it sits right in the middle of what was once very solid support and solid resistance. A move through either could create a snowball effect.
Outlook: Neutral
Silver
Silver briefly got above $22 but was unable to hold it. Similar to gold, at $21, it now sits right in the middle of what used to be very strong support ($20) and resistance ($22). Still, getting back above $20 is a positive sign after spending several months trapped below. It needs to hold $20 to stay cautiously bullish.
Outlook: Cautiously bullish until $22 is taken out with conviction
Figure 1: Gold and Silver Price Action
Gold
It’s bearish that the 50 DMA ($1684) is well below the 200 DMA ($1807); however, the size of the move suggested a mean reversion was probable (as noted last month). That reversion has occurred but run out of steam. It’s hard to get excited without a new golden cross forming.
Outlook: Neutral to Bearish
Figure 2: Gold 50/200 DMA
Silver
Silver has been leading gold in the recent move. The price even got above the 200 DMA ($21.50) and sits comfortable above the 50 DMA ($19.72). If it can build on recent gains then a golden cross could form in the coming weeks. Until then…
Outlook: Neutral
Figure 3: Silver 50/200 DMA
Gold
Open interest was above 500k for a single day on Nov 11 before spiking back downwards. With open interest still at very low levels, there is plenty of room for the market to move up strongly if it were to regain momentum.
That said, margin rates have also come down to the lowest levels since 2020. This gives the CME plenty of room to jack up margin rates and cap any move.
Outlook: Neutral
Figure 4: Gold Margin Dollar Rate
Silver
Silver is similar to gold with Open Interest sill very low along with low margin rates. As seen in October, it does not take much for an increase in Margin to have negative effects on price.
Outlook: Neutral
Figure 5: Silver Margin Dollar Rate
The gold miners have been consistently leading the price of gold in both directions for years. The current move in the miners is stronger than it was back in August when gold even got above $1800. While the sector was very oversold, it’s a positive development that the ratio has rebounded so strongly. This means stock traders are expecting the price advance to continue.
If the GDX can break back above $30 it could be a very bullish signal for both the metal and the miners. It got as high as $28.64 this week before coming back down to close at $27.37.
Outlook: Bullish
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.
Figure 7: Arca Gold Miners to Gold Historical Trend
Love or hate the traders/speculators in the paper futures market, but it’s impossible to ignore their impact on price. The charts below show more activity tends to drive prices higher.
Volume in both metals has picked up in recent weeks as interest has returned to the metals. If momentum continues, it could drive prices higher. Furthermore, if investors continue to dump Bitcoin in the wake of the FTX disaster, they will turn their attention back to a real inflation hedge (gold and silver). Increased attention and volume would drive prices higher.
Cautiously Bullish in Gold and Silver
Figure 8: Gold Volume and Open Interest
Figure 9: Silver Volume and Open Interest
Price action can be driven by activity in the Treasury market or US Dollar exchange rate. A big move up in gold will often occur simultaneously with a move down in US debt rates (a move up in Treasury prices) or a move down in the dollar.
Figure 10: Price Compare DXY, GLD, 10-year
The dollar and bond yields have crashed in recent weeks which was one of the main drivers for gold going higher. the DXY finished the weak below $107 after getting as high as $113 in early November. This is a dramatic move but is also not surprising given how lopsided the trade was. Everyone was long the dollar!
The recent move in the dollar and bonds has been fast and furious; however, both markets held up this week. The Fed will no doubt drive the next big move in both. A drop below $105 in the dollar will be a very bearish sign. The bond market is much more complicated as the Fed can directly intervene to affect rates.
Outlook: Neutral until the dollar breaks below $105
The gold silver ratio has been quite volatile of late, surging during the sell-offs, but reversing when gold and silver catch a bid. Silver has been leading gold, but that reversed in the latest week. Regardless, the ratio is still historically high.
Outlook: Silver bullish relative to gold
Figure 11: Gold Silver Ratio
The table below shows a snapshot of the trends that exist in the plots above. It compares current values to one month, one year, and three years ago. It also looks at the 50 and 200-daily moving averages. While DMAs are typically only calculated for prices, the DMA on the other variables can show where the current values stand compared to recent history.
The recent month is showing positive signs compared to the lookback from one year ago.
1 Month Ago | 1 Year Ago | 3 Years Ago | Current Daily Moving Averages | ||||||||
Variable | Nov 2022 | Value | % Chg | Value | % Chg | Value | % Chg | 50 Day Value | 200 Day Value | 50 Day % Chg | 200 Day % Chg |
Gold | |||||||||||
ClosePrice | 1,754.4 | 1,636.8 | 7.2% | 1,861.4 | -5.7% | 1,474.3 | 19% | 1,687.7 | 1,807.0 | 4% | -2.9% |
HUI Gold Ratio | 0.4 | 0.4 | 10% | 0.5 | -15.4% | 0.5 | -15.7% | 0.4 | 0.5 | 7% | -5.9% |
OpenInt_Ratio | 269 | 271 | -0.8% | 332 | -19% | 486 | -44.7% | 273 | 285 | -1.3% | -5.5% |
openInterest | 472,087 | 444,047 | 6.3% | 618,299 | -23.6% | 716,826 | -34.1% | 460,098 | 515,371 | 2.6% | -8.4% |
volume | 167,747 | 170,904 | -1.8% | 244,405 | -31.4% | 351,154 | -52.2% | 224,808 | 215,800 | -25.4% | -22.3% |
Silver | |||||||||||
ClosePrice | 21.0 | 18.7 | 12.3% | 24.9 | -15.7% | 17.1 | 22.7% | 19.8 | 21.5 | 6.2% | -2.3% |
OpenInt_Ratio | 6,526 | 7,353 | -11.3% | 6,239 | 4.6% | 12,943 | -49.6% | 6,831 | 6,784 | -4.5% | -3.8% |
openInterest | 137,016 | 137,426 | -0.3% | 155,360 | -11.8% | 221,557 | -38.2% | 134,789 | 144,828 | 1.7% | -5.4% |
volume | 54,886 | 60,219 | -8.9% | 83,464 | -34.2% | 120,104 | -54.3% | 72,762 | 69,767 | -24.6% | -21.3% |
Data as of: Nov 18, 2022. OpenInt_Ratio is the Open Interest divided by price. All values are point in time except for Daily Moving Averages. % Chg represents the Current value compared to the measured value. | |||||||||||
This analysis is far more neutral than it has been in the past. This is reflected in the price action as both metals are stuck between longer term support and resistance.
The precious metals market still lacks confidence. The paper traders are hanging on every data point that could influence the Fed decision. At some point soon, the Fed will pivot which will cause a massive surge in prices for both. That is when higher inflation numbers will drive metal prices higher instead of lower.
Until the next Fed move is clearer, the metals are likely to remain choppy. That could change if the demand in the physical market overwhelms the paper market before the path of the Fed is clear.
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11PM Eastern
Last Updated: Nov 18, 2022
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/