This does not look like a repeat of the 2011 blow-off top
This article first appeared on SchiffGold.
I typically write the Technical Analysis quarterly. I most recently analyzed the data last month; however, the gold and silver market have seen a years worth of activity in the last month. Thus, I thought it would be good to review again this month. Furthermore, as someone who lived through the last blow off top in 2011 and experienced a vicious 5-year bear market, I have been experiencing quite a bit of PTSD as prices climb higher and higher. As medicine, I have been reviewing all the data metrics I track to look for blind spots and determine if we are headed for another crash and burn.
I will warn you that my analysis below is a little lengthier than usual. As someone who witnessed 2011, I am doing this deep dive as much for me as you. TL;DR - we need to cool off, but there is no speculative bubble that is ready to pop
You have some market pundits like JP Morgan and Goldman calling for continued higher prices. Another segment think gold and silver have become the new meme stocks and are completely unhinged, ready to come crashing down. Elliot Wave folks are saying that we are near the top of a 10 year bull market, “maybe one more rally and then run for cover”. But Elliot Wave writers give themselves so many outs that they can pretty much claim they “called” anything.
I am just another voice in the crowd, but I wanted to chime in with simple hard data. The Comex update coming later this week will show that Comex delivery volumes remain very elevated. I have always stated that the Comex analysis will be the first warning sign and those alarms were blaring earlier in the year. Quick preview: the alarms are still going off. The CoTs analysis is another data heavy report, but there is not much to add to the latest one since the government is not updating the data. For the analysis below, I will continue to cover the data outside the Comex and CoTs.
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 September highlighted that both gold and silver looked healthy despite the recent price gains. That conclusion proved accurate as the price has continued to build on recent gains with gold and silver rising above $4000 and $50 (they were at $3700 and $44 at the time).
The analysis did call for consolidation and that point should be reiterated here. Nothing goes up forever and the market could use a healthy breather to consolidate.
Gold and silver continue to climb higher and higher in a very strong bull market that has gone vertical. The massive price gains have finally started to get headlines and attention across the market news outlets. This is unusual for both gold and silver, but some of it has been driven by a silver short squeeze in London.
The squeeze seems to be easing some, as reported by Reuters but the story is more complex than it seems. A recent deep dive had the following nuggets:
Bottom line is that the huge spikes could be speculative culmination due to extreme supply constraints in certain locations. These seem to be easing some which could cause prices to fall. However, there is still a general silver supply shortage which should put a floor under the market.
The price spike in the chart below is in response to the intense short squeeze and elevated lease rates, but it could be argued those prices are not unjustified. How many times can they keep flying metal back and forth between New York, China, and London to satisfy demand surges. Eventually people realize there just is not enough physical in this game of musical chairs.
Still, regardless of the driver, price spikes like the ones below usually reverse. At the very least, they need lengthy consolidations to be sustainable. So, unless we are on the verge of an imminent dollar collapse (doesn’t seem that way). Expect a correction or lengthy consolidation. Just don’t try and time the top!
Outlook: Bearish (neutral at best)
Figure 1: Gold and Silver Price Action
Gold
The 50 DMA has been above the 200 day for over a year now. This confirms the bullish trend is intact. The price has pulled away from the 50 DMA again which will likely lead to consolidation in the near-term. Both the 50 DMA and 200 DMA need time to catch up to the price. In 20 years, the price has never pulled away from the averages like it is now. This screams a need for consolidation or a pullback.
Outlook: Bearish (neutral at best)
Figure 2: Gold 50/200 DMA
Silver
Silver last had a move like this in 2011. Comparing the two periods, you can see that in 2011 it was far more severe. The current up move looks like the first start of the silver move when it went from $18 to $27 in 3 months. In 2011, it then almost doubled from there over the next 5 months to $50. To repeat the blow-off top of 2011, silver would have to take a direct trip to $100 from here over the next 5 months. If that happens, look out! Even without that move, similar to gold, the metal could benefit from a healthy consolidation or correction. I wouldn’t short this market because it can continue blitzing higher, but it is clearly unsustainable.
Outlook: Neutral to Bearish
Figure 3: Silver 50/200 DMA
Gold
The latest price pop has happened with barely a noticeable ripple in the futures market. Looking at the most recent 10-years, the open interest in gold is below the average. That does not scream of a market filled with speculative traders. Instead, it looks like this market is in a very reasonable spot, positioned to move higher.
Figure 4: Gold Price vs Open Interest
That said, on a notional level (factoring in price), the amount has reached all time highs above $200B. While this is simply math, and only natural with a market driving higher, you have to consider that some futures traders have seen their positions grow much bigger. Could this spur profit taking and exposure reduction? At the first sign of trouble, probably.
Outlook: Bearish
Figure 5: Gold Notional Open Interest
Silver
Silver open interest is still below a slate of recent highs over the last several years. This gives it plenty of room to move higher for a market that is not over-extended.
Figure 6: Silver Price vs Open Interest
That said, the price move alone has all of a sudden increased exposure and risk for a lot of traders. They might be looking to take profits and reduce exposure.
Outlook: Bearish
Figure 7: Gold Notional Open Interest
The futures market is really only bearish because of the price movement. When isolated to just open interest, the market looks normal. The same could be said about the ETF market.
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
Retail is starting to get on board, but they are below the positioning from 2022 and well below 2010-2012 and 2020. Again, on a notional level we are at all time highs, but retail is playing catchup. There are other ETFs out there (PHYS, OUNZ, SGOL, IAU, etc), but GLD is the bell-weather.
Retail usually marks the end of the party and we are simply not there.
Outlook: Bullish
Figure 8: ETF Analysis
Silver
SLV has seen a little bit of a pop as the recent price spiked, but we are still below the positioning in 2020 by a wide margin. It should be noted here that in 2011, retail did not participate in the speculative blow off.
Outlook: Bullish
Figure 9: ETF Analysis
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 on record. This would usually push speculative futures traders out of the market, but it has done nothing to dent the price advance. This shows a ton of strength in the bull market.
Outlook: Bullish
Figure 10: Gold Margin Dollar Rate
Silver
Similar to gold, margin increases have done nothing to dent the price advance. If margin rates keep going up, it might do the opposite. It’s clear that the buyers are not speculative traders, but the short side may be. If margin rates are higher, this might cause a cascade of shorts being closed. This would drive prices higher. This may be one reason that margin rates are below where they were in 2011… the CME doesn’t want to squeeze out the shorts.
Outlook: Bullish
Figure 11: Silver Margin Dollar Rate
The miners represent the long-term investors in the gold market. When GLD falls 1.5% on Friday and miners drop 7%, then on Monday GLD climbs 3.6% and miners climb 2%… it tells you that the equity investors are terrified that the gold price is unsustaimable. GLD has been dragging GDX along with it for years, with GDX mostly lagging.
In August, GDX finally started to catch-up and actually make gains on GLD. This is a good sign that the equity investors are finally starting to believe in the gold bull market. However, the action over the last two days tells you this market is still climbing a wall of worry.
Outlook: Very Bullish
Figure 12: Arca Gold Miners to Gold Current Trend
The chart above showing a big move YTD can be put in context with the chart below. Compared to 2011, the GDX is nowhere near the same level relative to the price of gold. Further, it would not be a linear relationship but an exponential one. This chart tells you how scared equity investors are to jump back in.
Figure 13: Arca Gold Miners to Gold Historical Trend
The next 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 have NOT been driven by excessively elevated volume. It’s quite shocking to see how normal the market looks as the price has exploded higher this year.
Outlook: Bullish
Figure 14: Gold Volume and Open Interest
Silver is in the same boat, reaching new highs with average volume.
Outlook: Bullish
Figure 15: Silver Volume and Open Interest
Price action can be driven by activity in the US Dollar exchange rate. A big move up in gold will often occur simultaneously with a move down in the US dollar. The dollar is still hovering near 100 which is on the higher side over the last 20 years. The dollar could easily break down as its unable to get its head back above 100. Back in 2011, the dollar was at multi-decade lows near 75 ready to move higher.
This is another example of how the current scenario looks very different than 2011.
Outlook: Bullish
Figure 16: Price Compare DXY and GLD
Gold fell last week despite the dollar also falling and bonds staying mostly flat. This is uncharacteristic and usually means a reversion of some kind. It’s always better to trust the larger market which is the currency and bond market in this case. The chart suggests that the down move in gold last week was unwarranted which may lead to a turnaround this week.
Outlook: Bullish
The gold silver ratio has fallen back down close to 80. While this is a big fall from where things were as recently as April (105), 80 is still very elevated. In 2011, the ratio collapsed to 32. So when comparing things to 2011, we are nowhere near as close, especially in the silver market.
Outlook: Silver bullish relative to gold long-term
Figure 17: Gold Silver Ratio
The GVZ is like the VIX for gold. It shows how the options traders are pricing the gold market. Right now, the indicator is definitely elevated, but not excessively so. Its below 2011 and 2020 which suggests the options traders, arguably the sharpest traders out there, are seeing risk, but not excessively so.
Outlook: Bullish
Figure 18: Gold Volatility Index (GVZ)
Putting price action aside and looking across all the indicators shows a market that looks fairly normal. There is nothing that harkens back to 2011 suggesting a massively stretched market. Open interest, trade volume, ETF holdings, the Dollar, Gold/Silver ratio, and GVZ all paint a market that is in line with historical averages.
Once you layer in price action, there are reasons to be concerned. The only thing that can explain the price spikes is a physical market under duress. I think the Comex is showing early signs of that, but I also do not see an imminent re-pricing in gold. Not impossible, but seems like we are not there yet. But we will be there someday and it’s not crazy to assume we are in the early innings.
The late Robert Wenzel used to say that $100 up moves in gold will one day start happening more and more often. It did today, and there is no reason to think that will be the last one.
Bottom line, a pullback or consolidation would be healthy and expected. But if the market is finally waking up to the risk in the dollar and gold/silver are being repriced, any price correction should be bought.