This does not look like a repeat of the 2011 blow-off top
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 two technical analysis pieces have been spot on. The first one in September identified a bullish trend and despite massive moves concluded that “the market still looks very healthy but might be due for another consolidation period before attempting $4000 gold and $50 silver”. The market kept going and took out both but quickly retreated.
In October, the conclusion was “we need to cool off, but there is no speculative bubble that is ready to pop”. That was published the day before the market sold off and went through the last correction.
While we certainly got a correction, it was much shallower and shorter than I would have guessed. We are again in a similar situation, with some bullish indicators below, but the price action giving anyone a reason to pause.
The price continues to move up unabated. On one hand, both metals have bullish tail winds from breaking our over major resistance levels… especially in silver with $50. That said, prices cannot move up like this every single day, there needs to be time for the metals to rest and recharge.
The next major milestones in both metals are $5000 and $100. This would have been unthinkable a few years ago, but a lot has happened. A straight line there would be a bad sign and signal a blow-off top that could result with a major bear market. It would be better if both metals consolidated their gains and let the hype die down.
Outlook: Bearish (neutral at best)
Figure 1: Gold and Silver Price Action
The log chart does paint a less dire picture. From this standpoint, both metals are looking more like they did in early to mid 2000s. That was the first breakout and preceeded a multi-year rally. While it’s likely this is the case, that market was marked by pullbacks along the way. Expected the same here, but timing them will be hard.
Figure 2: Gold and Silver Price Action
Gold
The 50 DMA has been above the 200 day for two years 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. The 50 DMA did catch up briefly in November before the price pulled away again. More time is needed.
Outlook: Bearish (neutral at best)
Figure 3: Gold 50/200 DMA
Silver
Silver has really pulled away from the 50 DMA. This is almost accompanied by a pullback. Unless something has fundamentally broken in the market (not impossible but also not probable), then expect a pull back here. It is just too far out over it’s skiis.
Outlook: Bearish
Figure 4: Silver 50/200 DMA
Gold
The latest price pop has happened with only a modest move higher in open interest. While the price is going parabolic, the futures market remains relatively calm.
Figure 5: 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 6: Gold Notional Open Interest
Silver
Silver open interest is similar to gold and well below any recent all-time high. This again shows that speculative money is not driving the market higher.
Figure 7: Silver Price vs Open Interest
Even with open interest low, the notional amount has skyrocketed with the price. Again, this could be a little too much exposure for some people, which could also justify the smaller aggregate open interest.
Outlook: Neutral to Bearish
Figure 8: Silver 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 9: 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 10: 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. The margin has not been raised since October which was the last time the market corrected meaningfully.
Outlook: Bullish
Figure 11: 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. The margin rate has been jacked up to historical levels recently, with the latest increase coming on Dec 12th. Again, this is not slowing the price.
Outlook: Bullish
Figure 12: 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. The sell off happened as soon as we got to 2%. The pullback was bought quickly and we rallied back. We still have a long way to go! If we break through 2% it could indicate the next leg up in the miners.
Outlook: Very Bullish
Figure 13: 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 14: 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 been accompanied by higher trade volume. The wild part is that the trade volume increased as open interest was shrinking. Volume has slowed the last couple weeks and will likely slow further in the coming weeks with the holidays. This could lead to a less liquid market where the price may be more susceptible to volatile moves.
Outlook: Cautious
Figure 15: Gold Volume and Open Interest
Silver is in the same boat, volume brought lower open interest. Volume will likely slow over the next two weeks.
Outlook: Cautious
Figure 16: 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. Gold and silver have been moving higher even while the dollar has stayed relatively strong. If the dollar were to see a new leg down, then it could easily provide more fuel to the gold/silver price rally.
Outlook: Bullish
Figure 17: Price Compare DXY and GLD
The gold silver ratio has collapsed in recent weeks as silver has led the charge. The ratio now stands at 66 which is the lowest it has been in almsot 12 years. Again though, big moves like this are usually not sustained. That said, if silver is breaking out relative to gold then it might be a bullish indicator. This one is too tough to call.
Outlook: Neutral
Figure 18: 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 around the mean level from the past 10+ years. This means the market is not pricing in major volatility in gold over the next 30 days.
Outlook: Neutral
Figure 19: Gold Volatility Index (GVZ)
This is definitely one of the more conflicting technical analysis pieces. The price action makes a very strong bearish case. The fundamentals like open interest, margin rates, miners, ETFs flows, and then general Fed/Government policy paint a very healthy market. The next level of data includes the DXY, gold/silver ratio, and trade volume. These paint a neutral picture. Pulling it all together, the bullish picture is there but the price action may need a rest.
A hard read for sure, but if I had to declare a short-term forecast, then I think we will see a pullback in the metals. While the momentum looks unstoppable right now, I think the market needs a lengthier period to digest recent gains and make a sustained rally to $100 and $5000.
I am not a seller, nor am I an aggressive buyer. Right now I am hoping the miners make up ground while the metals consolidate. The best course of action is to steadily buy into the market.