Precious Metals On The Cusp Of A Bullish Breakout?

Summary

  • Gold: A pair of bullish key reversals.
  • Silver: Flirting with technical resistance.
  • Platinum: Recovery takes the laggard towards $1000.
  • Palladium: New record high.
  • Precious metals are following a familiar path.

Since the beginning of December 2017, the precious metals sector accomplished some significant feats. The prices of gold and silver formed what now appears to be bottoms in the final month of last year, which was a repeat of bearish price action during December that has been in place for three consecutive years. The bounce from the lows over recent weeks and at the beginning of 2018 is another in a series of bullish starts to the year for the third year in a row.

Palladium reached a milestone at the start of 2018 as the price moved to a record-level surpassing its 2001 high at $1090 per ounce. Platinum, the laggard of the sector since back in 2014 which was the last time that "rich man's gold" garnered a premium to the yellow metal, has moved from $877 per ounce on December 12 to the $975 level. Platinum has rallied almost $100 higher in less than one month.

Precious metals have started 2018 in bullish fashion, and it appears that some of the metals are at or moving towards levels that will put them on the cusp of a bullish breakout.

Gold- A pair of bullish key reversals

After trading at a high of $1303.40 on November 27, 2017, February COMEX gold futures fell to lows of $1238.30 on December 12.

Source: CQG

As the daily chart highlights, gold rallied in the wake of the FOMC's final meeting of 2017 where they increased the Fed Funds rate by 25 basis points. The market expected the move and in a sell the rumor and buy the fact reaction, gold took off to the upside and has surpassed its late November high closing on Monday, January 8 at the $1321 level after trading to a high of $1327.30 per ounce on November 27. On that day, the yellow metal put in a bullish key reversal trading pattern on the daily chart as it traded below the previous day's low and closed above the prior session's high.

The bullish technical pattern was not the first for gold as a more significant pattern emerged in
December.

Source: CQG

As the monthly gold chart shows, the yellow metal put in a bullish reversal pattern in December. The last time gold achieved this feat was back in July 2011 when it was on its way to an all-time high at $1920.70 per ounce in September 2011. On a technical basis, gold has not looked this bullish in quite some time. Critical resistance for gold stands at the 2016 at $1377.50 per ounce with minor resistance at the 2017 peak at $1358.50.

Silver: Flirting with technical resistance

Silver is the most volatile trading sardine in the precious metals sector. Silver has a long history of wide price variance. Speculators tend to go to the silver market first because of its penchant for price volatility which makes it lead the path of least resistance for gold at times. Like gold, silver traded to a bottom in December when it reached $15.635 per ounce on the March COMEX futures contract on December 12.

Source: CQG

As the daily chart illustrates, March silver had traded at $17.485 on November 17 before it led gold on the descent that took it to the December low. Silver had been consolidating between around the $17 level from mid-September through late November, but the bottom end of the trading range gave way sending it to a low in mid-December. Since then, silver recovered and was trading around $17.165 per ounce on January 8. There continue to be lots of price congestion between $17.30-$17.50 per ounce on the March futures. However, if silver can move above the upper end of that range over coming sessions, we could be in for a challenge of the September 8 high on the March contract at the $18.36 level.

Source: CQG

On the weekly chart, silver has been making lower highs since 2011, but a move above the September high one the continuous contract would negate the bearish price pattern. Price momentum has turned higher in the silver futures market as the slow stochastic has crossed to the upside in December.

Silver has a habit of doing the unexpected and, as a leader, it could hold the key to the path of least resistance for the precious metals sector in the coming weeks and months.

Platinum: Recovery takes the laggard towards $1000

Platinum has been a dog with fleas when it comes to price performance in the precious metals sector since late 2014. In 2017, the rare precious metal was a laggard once again, posting a 3.59% increase on the year while gold was 13.65% higher, silver moved 7.42% to the upside, and palladium posted an over 56% gain. In December, platinum fell to the lowest level since February 2016 at $872.40 per ounce.

Source: CQG

As the weekly chart shows, platinum has rallied for four straight weeks since the low and was trading at $970 per ounce on January 8. The April futures contract was at the $977 level. The momentum indicator on the NYMEX platinum futures contract has shifted into a bullish pattern.

Platinum continues to offer the best value on a long-term basis in the precious metals sector. The platinum-gold spread is trading at around a $345 discount, platinum under the price of gold. The long-term norm for the price relationship is a $100 to $200 premium for platinum. Platinum has not traded at a premium to gold since late 2014 making its nickname "rich man's gold" a thing of the past, for now.

Platinum is also exceedingly cheap when compared to the price of palladium. From 2003 through 2014 platinum traded at over a $500 per ounce premium to palladium. The premium had been in place from 2001 through September 2017. However, during the final four months of 2017, platinum slipped versus the price of palladium and was trading at around a $118 discount on January 8. Platinum is trading at the lowest level against palladium since 2001, which is more a function of the increase in the price of palladium these days.

From the December 13 low on April NYMEX platinum futures at $877 per ounce, the precious metal has posted a gain in fourteen of seventeen trading sessions. Technical resistance for platinum stands at the September 5 high of $1026.50 per ounce, but $1000 tends to stand as a significant psychological level for the precious metal. Platinum and palladium have a myriad of industrial uses as they both have a high resistance to heat and are perfectly suited for catalysts in automobiles, oil refining, fiberglass manufacturing, as well as other consumer applications. Palladium had become the preferred metal because it traded at a lower price than platinum from 2001 through 2017. However, platinum is a denser metal, and it has a higher melting and boiling point. It is possible that we will see some of the industrial consumers switch from palladium to platinum in 2018 as the price of the metal is now lower.

Palladium: New record high

In early 2016, the price of palladium found a low at $451.50 per ounce, and since then, it has been off to the races for the metal.

Source: CQG

As the weekly chart of NYMEX palladium futures shows, the price has more than doubled over the past two years and it traded to a high of $1101.70 in early January.

Source: CQG

As the quarterly chart demonstrates, during the first days of 2018, palladium rose to a new record level surpassing the 2001 high at $1090 per ounce. Palladium has been the beneficiary of increasing demand for industrial commodities over recent months. Moreover, it was the best performing commodity of all in 2017 posting a better than 56% gain on the year.

While gold, silver, and platinum remain well below their all-time peak prices, palladium is at a level that defies gravity as the March futures contract was trading around the $1096 level on January 8 after reaching its new apex during the first week of this year. Technical resistance stands at the recent high at just above the $1100 per ounce level.

Precious metals are following a familiar path

Precious metals are starting 2018 just like they did in 2016 and 2017 with rallies across all members of the asset class. The metals that trade on the COMEX and NYMEX divisions of the Chicago Mercantile Exchange are all in bullish mode and had positive price momentum at the end of the first week of the year.

The dollar index has been supportive of the prices of these metals as it was trading close to the lows of 2017.

Source: CQG

As the weekly chart of the U.S. dollar index shows, support for the greenback is at the early September low at 90.99 and was trading at 92.09 on January 8. The index traded down to 91.47 during the first week of January, but bounced to over 92 on Monday, January 8. The current level of the dollar is a far cry from early last January when the index traded to the highest level since 2002 at 103.815. A lower dollar tends to be highly bullish for precious metals prices, and if the index slips to a new low, it could ignite the prices of all four of the metals in the sector. However, it seems that a recovery in the greenback could be brewing.

At the same time, the geopolitical landscape remains a minefield of potential problems with rising tensions in the Middle East as the conflict between Saudi Arabia and Iran continues to intensify and spread throughout the region. On the Korean Peninsula, a nuclear-armed North Korea presents the world with perhaps the most significant challenge to global peace in decades.

In the U.S., the political division could present periods of risk for markets across all asset classes in the weeks and months ahead.

Precious metals tend to thrive during periods of fear and uncertainty. There are many issues facing markets these days that could exacerbate the bullish environment for precious metals. Meanwhile, the one thing going against the sector is the trend of interest rates in the U.S. and around the world. Global economic growth is likely to support rate hikes by the Fed and perhaps the
ECB and other central banks in 2018. Rising real rates increase the cost of carrying precious metals positions. However, if rates begin rising because of increasing inflationary pressures, that could provide another level of bullish support for gold and silver which are traditionally barometers of inflation.

After trading to lows in December and completing the third straight year of a pattern where precious metal made bottoms during the final month of the year, the prospects for 2018 is looking bullish for the sector. However, gold, silver, and platinum are moving towards critical technical levels that could determine the path of least resistance for the rest of the year. Keep an eye on silver over coming sessions as the volatile metal tends to provide clues on the price paths of both gold and platinum.

I am currently bullish when it comes to the price of silver and am a buyer on a scale-down basis during periods of price weakness.

Source: CQG

SLV is the unleveraged silver ETF product that does a good job replicating price action in the precious metal sector. As the long-term chart of SLV shows, the price of the ETF has been consolidating. If precious metals are breaking out to the upside, we could be in for a dramatic move in this ETF. Risk-reward currently favors a move higher in the volatile metal which is long-overdue for a rebound that could surprise in the weeks and months ahead.

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This article was written by

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Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is the #2 ranked author on Seeking Alpha in both the commodities and precious metals categories. He is also the author of the weekly Hecht Commodity Report on Marketplace - the most comprehensive, deep-dive commodities report available on Seeking Alpha.

Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.

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