Silver And Gold, Everyone Wishes For Silver And Gold

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Includes: AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: Heidi Tait

Summary

A gold or silver long has been a profitable January trade over the last 20 years 70% of the time.

Current positioning looks to be set up for this trade.

Market conditions seem to be ripe for a good gold and silver pop into the new year.

Image taken from YouTube

Over the last 20 years going long silver or gold into the new year has been profitable about 70% of the time. As far as trading is concerned those are pretty good odds and a reason why many traders, fund managers and the like may choose to go into a seasonal position like this. Looking at the S&P 500 over the last 20 years, equities are down about 50% of the time. Of all the seasonal trades we hear about the stock market, the long gold and silver trade into the new years seems to be one of the most reliable. What about 2018, will the gold and silver long trade be profitable again for the month of January?

The best way to assess this at the moment is to take a look at positioning. I have highlighted areas of the chart where long positioning has been over 90% of reported positions.

Chart created by myself in Excel, data from CFTC.com.

Chart created on tradingview.com

Here is recent positioning by medium to large money managers in the gold futures. As you can see on each swing high, we have extreme levels of interest or long positions. These positions die off as they become unprofitable and new interest is generated. Looking further back over gold positioning, we can see that sometimes managed money is a bit late to the party, but they will hold on to extreme positioning even as the trend dies. Below, I have highlighted times over the last decade that positioning has been over 90% long.

Chart created on tradingview.com

It is apparent that the exuberance is much shorter lived for the long extreme positioning than it had been in the past. Next is a chart showing positioning over time in a line graph as well as a chart that includes producers and others (smaller speculators).

Chart created by myself in Excel, data from CFTC.com.

Chart created by myself in Excel, data from CFTC.com.

Both of these charts can be read similarly. In the first, we are looking at percentages short and long of money managers alone. The second is the net positioning of producers, money, and others. In the first chart, we are looking for the point where the longs and shorts intersect. This usually means that price is at a turning point, or close to one. For the net positioning chart, we are looking for the producers and the money manager lines to come close together to look for changes in price. It is important to remember that we are looking at data from 12/19. These reports are released by the CFTC every Friday, with the data collection occurring on Tuesday of that week.

Keeping all of this in mind and going back to the first GC price chart, we should be able to ascertain that managed money has likely increased long positioning again into the holiday. The long-term managed money positioning in gold chart does not give a great signal either way as the long and short lines have not met. The next chart that includes producers and managed money shows gives a better signal that we should be looking for a bounce.

From this information alone, we can safely say that there should be some long-sided price action going into the new year. If you look at the charts below, you will see that silver is in much the same situation.

Chart created by myself in Excel, data from CFTC.com.

Chart created by myself in Excel, data from CFTC.com.

Based on the positioning data alone, we should be expecting at least a bounce in prices over the near future. Another critical piece of data to look at is the USD comparison to the gold contract. Historically the USD and GC have a fairly high inverse correlation. Below are a few charts over different time frames to consider. The price line ending in 92.925 is the USD, and 1279.1 is GC.

Weekly chart created on tradingview.com

Daily chart created on tradingview.com

This is interesting, in that, gold’s big move up didn’t happen until after the USD had a great fall shortly after the dot-com bubble burst. From the weekly chart, one could best surmise that we are on a path to more substantial price divergence between the two. As in, over the longer term, just by going by these charts, it appears as though gold will be headed down and the USD will be headed up. This may or may not be the case, and form this information alone it is hard to tell at what point this will happen. Especially now that price moves in the USD, as well as gold, have been heavily politically driven lately and politics can be slow and messy.

I do think that the fact that gold has more or less held its ground since the 2014 taper tantrum in the USD goes to show that investors continue to be very nervous about new market downturns. It is evident in the daily chart that gold investors prepared early for the taper tantrum. Now, the muted price movements, tell me that gold investors are not sure what is to come next for the dollar. However, they want to be prepared in case that is bad for the dollar and the general markets.

If you keep your ears open to the podcasting financial community, you will hear people that don’t usually speak of doom and gloom for equities starting to say that now may be the time to get out. This is mainly due to the current state of the yield curve, that it may become inverted, there may be a US recession, and there may be an equity sell-off. I talked a bit about the yield curve and how it could turn up in; “Can The FOMC Steepen The Yield Curve Without Initiating A Recession?” Of course, dollar and equity sell-off conditions would create a bullish environment for gold. I think that the fact that more and more people seem to be worrying about this puts us in a good position for a gold long into January.

So far, we have, the fact that 70% of the time a January long position in silver or gold has been profitable. The positioning data looks to be telling us to watch for a near-term bounce, and overall sentiment is negative on the USD and starting to turn a bit negative on equities. There is one more facet I would like to look at here, and that is the pure technical of the gold and silver charts.

Chart created on tradingview.com

Chart created on tradingview.com

The first chart is daily GC and the second is daily SI. Both appear to be in somewhat of longer-term consolidation modes of price action. I do think that a long as there is a good amount of pressure on the USD that the upside could be favored in both of these cases. If I were to get into a gold long tomorrow, I would be looking to reassess my position when price hit about 1295. Similar with silver, looking to re-evaluate at 17.76. The overall trend for gold is a bit bullish while the trend for silver is pretty flat. In both cases, price looks to be testing upper limitations from the recent down moves.

Overall, a gold and/or silver long look to be like a good trade going into the new year, especially if we get a bit of an equity sell-off. That could push prices up significantly. With the tax reform bill going through in January, this could cause a bit of market volatility for a bit as people reposition themselves to take the best advantage of the situation. This fits in with my analysis that the broad US market should head sideways for a bit before moving significantly to the upside again. I will be looking at going long gold and silver through the futures, hedging with options. This could also be done through one of the many ETFs out there such as GLD, SLV, IAU, DGL, UGLD, UGL, USLV, SIVR and DBS.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.