The setup is bullish
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 in July was spot on, concluding that the mid-summer consolidation in gold was coming to an end. It left the door open for a down move, but the data was much more indicative of a strong up-move coming soon. That was when gold was at $2400. Now at $2700, the data below actually shows there is still room to run, especially in silver.
Both metals have broken resistance with gold reaching a new all-time high at $2730 and silver reaching a new 10 year+ high at $33.23 on a massive up-move Friday Oct 18. Despite the recent gains, there seems to be little technical resistance anywhere in sight for either metal.
Outlook: Bullish
Figure 1: Gold and Silver Price Action
Gold
Gold has made a big move pulling away from both the 50 and 200 daily moving average. This has also dragged the 50 DMA way above the 200 DMA. History suggests that the metal needs time to consolidate or even pull back some in order to give the 200 DMA time to catch-up.
The two charts below shows a a much longer history to put the current move in context. For gold, the current move is reaching a level that has previously been met by consolidation.
Outlook: Neutral to Bearish
Figure 2: Gold 50/200 DMA
Silver
Silver is in a similar situation, but earlier in the move. The longer historical chart shows that it is not yet seen a move that requires a pullback or rest period like gold, which means it should have more room to run before needing a consolidation.
Outlook: Slightly bullish
Figure 3: Silver 50/200 DMA
Gold
Open interest is elevated but not well above average. Even though the CoTs report showed that Hedge Funds are overbought, the total open interest is still within a normal range. Furthermore, the latest CoTs report shows that Hedge Funds have actually trimmed positions while the price has continued to rise.
Outlook: Neutral to Bullish
Figure 4: Gold Price vs Open Interest
Silver
Talk about a bullish chart! The plot below shows that open interest in silver has collapsed but the price remains elevated. You can see how open interest dropped back to the levels from the start of the year, but the price remained well above the start of the year. Now open interest has a low base on an already elevated price. This means there is little room for selling but a lot of room for buying with the price already at a new high.
Outlook: Very Bullish
Figure 5: Silver Price vs Open Interest
This is a new metric for this analysis. GLD and SLV are the two most popular ETFs that track Gold and Silver. While institutions will buy these funds, this data generally shows retail interest. the chart shows the price and shares outstanding. Shares outstanding is the metric that shows overall retail interest.
Gold
While shares outstanding has moved a little higher, it is well below the craze of 2020 and 2011. It is much closer to the bottom than the top which means the retail crowd has not yet jumped on board this train. There may be cause for concern once the retail money jumps on board, but until then…
Outlook: Bullish
Figure 6: Silver Price vs Open Interest
Silver
Similar to gold, retail invetors are just now dipping their toe in the water. This is a stealth bull market that has plenty of room to keep moving higher.
Outlook: Bullish
Figure 7: 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 March 2021. The CME does not have much room to raise margin requirements much higher. Furthermore, the increases have done very little to restrain the current move.
Outlook: Bullish
Figure 8: 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, but similar to gold, it’s possible that does not dent the upward momentum. TBD on this one.
Outlook: Neutral
Figure 9: Silver Margin Dollar Rate
The gold miners have been consistently leading the price of gold in both directions for years. The GDX has finally broken out and is sitting at a 10-year+ high.
Outlook: Bullish
Figure 10: 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 11: 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 new high prices has not been driven by excessive volume. This means that traders have not yet jumped in to fuel the rally higher. When they do, it should further push up the price.
Outlook: Bullish
Figure 12: Gold Volume and Open Interest
Silver is in a similar boat. Trade volume has not really ratched it up with the latest price spike.
Outlook: Bullish
Figure 13: Silver Volume and Open Interest
The data paints an overwhelmingly bullish picture. The two areas for concern are:
That said, it’s hard to see where in the data a pullback is coming. There is nothing to suggest the recent price moves cannot continue moving higher. Even the CoTs report is showing that Hedge Funds have backed off their bullish bets, leaving less room for a fire sale.
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11PM Eastern
Last Updated: Oct 18, 2024
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/