Other variables point to a shallow correction
This article first appeared on SchiffGold.
This analysis attempts to look at different metrics to understand the current momentum in the gold and silver markets. It is meant as an analysis on potential price direction in the very short-term (1-2 weeks).
In the analysis below, the price indicators suggest the correction has more to go, but some of the less watched metrics indicate the correction could be much more shallow. Given the data as shown below, the latter seems more likely which means the correction may have run most of its course at this point.
Both metals saw very large rallies since the start of March which came to a sudden and much needed break on April 19th. The correction has been fast and strong. The chart below shows that both metals have further to fall in order to test both support levels which are around $26 in silver and $2100 in gold.
Outlook: Bearish
Figure 1: Gold and Silver Price Action
Gold
Gold definiely got ahead of itself and now sits way above both the 50 and 200 DMAs. Based on the chart below, the best case would be sideways action until the moving averages catch up, but the more likely scenario is a further pullback.
Outlook: Bearish
Figure 2: Gold 50/200 DMA
Silver
Silver is following a similar pattern. Historically, price spikes do not last and are sold off pretty hard in the weeks that follow.
Outlook: Bearish
Figure 3: Silver 50/200 DMA
Gold
This is where things get interesting. Only the first leg of the up-move was driven by an increase in open interest. The second leg up was actually happening as open interest was falling. This means that futures traders had already given up on the rally in mid-March before prices really took off. These traders missed the move up which means there is cash on the sideline to push prices higher quite quickly. It’s likely these traders will not wait for a larger correction before jumping in.
Outlook: Bullish
Figure 4: Gold Price vs Open Interest
Silver
Silver is different than gold here because open interest and price action were much more closely correlated during the bull run. Open interest remains high relative to recent history which means that more sellers could come in quickly if prices do not hold here.
Outlook: Neutral to bearish
Figure 5: Silver Price vs Open Interest
The CME uses margin requirements to pull momentum out of the futures market. This is usually done to halt explosive up moves markets and contain them, but can be used in quick bear markets as both shorts and long are subject to margin requirements. Margin increases force traders to put up more capital or sell off contracts to meet requirements. Managed Money (see CoTs report) are more sensitive to margin increases as they tend to be more levered and capital constrained, so usually margin increases slow the momentum of the Managed Money group (think Hedge Funds).
Gold
Margin rates have been pushed to their highest level since April 2021. Margin rates probably won’t go too much higher. They have alread had the impact of containing open interest. As shown above, the price continued higher despite a decrease in open interest. This means that futures traders were not responsible for the latest up move in gold. Thus, an increase in margin could do little to keep prices down if another up move were to comments. This removes the CMEs ability to contain the next big run-up.
Outlook: Very Bullish
Figure 6: Gold Margin Dollar Rate
Silver
Once again, the sitution in silver is not similar to gold. This market looks more like historical instances. This means that any up move in silver is likely to be met with higher margin putting a cap on prices.
Outlook: Neutral to bearish
Figure 7: Silver Margin Dollar Rate
The gold miners have been consistently leading the price of gold in both directions for years. That said, the miners did not fully participate in the last move up and gold which further suggests that traders are not in control of this market right now. This is likely not a reliable indicator at the moment.
Outlook: Neutral
Figure 8: Arca Gold Miners to Gold Current Trend
The chart below shows the longer-term historical relationship. The miners have been absolutely punished over the last decade as stock traders have never bought into the current move in gold. That leaves these stocks deeply undervalued and set up for an explosive move when the gold price takes off.
Figure 9: Arca Gold Miners to Gold Historical Trend
The final indicator is trade volume on the CME. This is related to but not exactly tied to open interest. Higher trade volume with flat open interest can mean churn. Higher trade volume can also be met with increases or decreases in open interest if buyers or sellers are in control.
In gold, there is once again evidence that futures traders were not driving the price spike. Trade volume was slightly above average but significantly elevated compared to history. Compare this to 2020 when gold last spiked higher and you see much higher trade volumes. Once again, it is clear that traders did not drive the latest price gains in gold.
Outlook: Very Bullish
Figure 10: Gold Volume and Open Interest
Once again, silver is diverging from gold. It is clear that trade volume in the futures market was driving prices higher. This means that silver is more susceptible if traders decide to exit or even short the market.
Outlook: Netural to Bearish
Figure 11: Silver Volume and Open Interest
On the surface, the recent price spikes in gold and silver look a lot like history where big price spikes run out of steam and are then sold off over the coming weeks and months. The rest of the data easily aligns with this narrative in silver, but not in gold. It is very clear that something else is going on in gold. The second price spike in gold did not originate on the CME.
It looks like gold got triggered somewhere outside the CME and then silver traders were forced to play catch up. These same traders were all too ready to sell at the first sign of trouble as they always do. What they are missing is that the floor on gold should be much higher because you don’t have gold traders itching to sell. The gold traders who have sold, were the ones who jumped onto the first price spike (Mar 1- Mar 14). This likely means their selling is close to exhausted.
Gold may not immediately rebound and jump higher (though it may), but it is much less likely that another major down leg is seen in the near term. The uspide in gold is much bigger than the downside, and silver tends to follow gold.
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11PM Eastern
Last Updated: Apr 30, 2024
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/