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 (a few weeks to 1-2 months).
The last technical analysis concluded that a new floor had been established in the gold market and it would be unlikely that a major sell-off would occur in the market. The market would move higher at some point, but a move was not necessarily imminent. This turned out to be an accurate reading, with gold prices unable to hold onto the gains above $2400. We can not look at the data again to see if there are any more clues about upcoming price movements.
Both metals saw attempts to reach new highs (in silver it was not an all-time high but a high for this move), only to see the rug pulled out from under them. Gold got there, silver did not, but both metals sold off immediately. As mentioned in the last analysis, gold seems to have a stronger floor under it. Silver will likely be tested but will follow gold in the end.
The move in silver looks to have been completed, which likely means the gold correction is nearing its completion as well. It did not go as deep but stayed within the range that it’s been trading in for the past several months.
Outlook: Bullish
Figure 1: Gold and Silver Price Action
Gold
Gold got ahead of itself but has consolidated recently, giving the 50 DMA time to catch up. It is not looking like an immediate break out is coming, since the 200 DMA still has catching up to do, but there is less need for a pullback to cool down the market.
Outlook: Neutral
Figure 2: Gold 50/200 DMA
Silver
Silver took a much harder dive and now sits between the 50 and 200 DMA. The correction has been swift and severe but looks set up to go in either direction still with a slight lean towards an up move given the severity of the pullback.
Outlook: Slightly bullish
Figure 3: Silver 50/200 DMA
Gold
Open interest has seen a healthy pullback without doing too much to damage the price. It is still at the higher range of the last few years, but a lot of the weak hands have been cashed out.
Outlook: Neutral to Bullish
Figure 4: Gold Price vs Open Interest
Silver
Silver has seen more of a pullback in open interest, and similar to gold did not have to give up all of the price gains. Likely the selling is almost exhausted.
Outlook: Bullish
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 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 margin increases typically force them to liquidate positions (if they are long prices go down as they sell and if short prices go up). More often, traders are long and higher margin causes forced selling.
Gold
Margin rates have been pushed to their highest level since April 2021. Margin rates probably won’t go too much higher. This means a further pullback would likely not be driven by an increase in Margin.
Outlook: Bullish
Figure 6: Gold Margin Dollar Rate
Silver
The last Margin increase came in May. There is still room to push Margin rates higher if the price were to find strength.
Outlook: Neutral
Figure 7: Silver Margin Dollar Rate
The gold miners have been consistently leading the price of gold in both directions for years. The GDX sits near 1-year highs. There has been a pullback with the latest gold pullback but the trend is still up.
Outlook: Bullish
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, the volume has increased recently which drove open interest higher. Volume comes in waves and it could very much mean volume will drop into August. This would mean flat to lower prices ahead.
Outlook: Bearish
Figure 10: Gold Volume and Open Interest
Silver saw a drop in volume recently which was accompanied by the pullback. Volume is now closer to the bottom of the range which likely means the sell-off is near complete.
Outlook: Neutral to Bullish
Figure 11: Silver Volume and Open Interest
Most of the indicators are bullish. This is a good sign. Silver saw a very harsh correction but appears to be nearing the end. Gold remains elevated but on the lower end of the tight trading range it has been in. The consolidation in gold has now completed its fourth month. The consolidation is probably nearing the end. While the consolidation could end in a down move, the setup looks much more likely that the consolidation will result in a big up move. This could be coming sooner than most think.
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11PM Eastern
Last Updated: Jul 26, 2024
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/