By David Brady
I am expecting gold to test the resistance zone between 1,370-80 next with a healthy pullback to follow. But I do not recommend anyone short gold in this market. As the Elliott Wave theorists put it, a Wave 3 (or C) is under way in gold and any pullbacks are to be bought under such circumstances. Shorting in this environment is playing with fire. This is a buy-the-dips market. We are heading up to new highs in the 1,400s before this rally is complete, in my opinion.
The same goes for silver and the miners. Silver could reach 20 or above before this rally is done.
The current rally in gold is in its final wave V of (1) higher. The 2-hour chart below shows that we are setting up for negatively divergent higher high, typical for the end of a wave 5, before we head down in wave (2). Targets will be provided on the downside once that peak is reached.
The daily chart shows that gold is extreme overbought across all indicators as we head towards critical resistance. The RSI is at 76 this morning. It is clear that we are going to get a reversal soon to correct the overbought signals.
Sentiment is also becoming extremely bullish. The spot DSI is at 65. As we approach the peak in gold, this will increase to extreme levels also signaling the pending drop. It has already risen 44 from its bottom of 21 just six days ago.
However, the 21-day moving average is at a meager 36, up 4 from its low of 32 six days ago. It is clearly in an uptrend, setting higher and higher lows. This reinforces my view that any dips are to be bought because this has a long way to go yet.
With regard to positioning, the funds were barely long ahead of this rally, but we have to wait until later today to see just how fast they have been adding long positions in the past week. I am guessing they have ramped up their net long position as they always do when they chase the price higher.
What we do know is that open interest has soared by over 50k contracts in just the past 6 days since this rally began. If the funds are loading up long, and I'm sure they are, it means the bullion banks are likely backing up the truck on the short side which also supports the pending pullback I am forecasting soon, once we reach the target resistance zone or perhaps before.
Silver will clearly follow the same path as gold to the downside when the pullback begins, but to a lesser degree, in my opinion. The Gold:Silver ratio ("GSR") briefly exceeded 91 on Wednesday.
This is the highest level since October 2008:
What happened in October 2008?
Suffice to say this is extremely bullish for both gold and silver, the latter even more so. Note on the daily and monthly charts for the GSR above that the RSI is extreme overbought on both. Yet another sign that the GSR is about to peak and fall or it already has peaked. Hence, why silver should outperform gold from here on out.
Looking at silver specifically, you can clearly see that it has significantly lagged gold in this rally so far, but this goes in silver's favor now. It means that silver had sold off to a greater degree than gold before the rally began and is therefore nowhere near as overbought as gold is now. When the pullback in gold occurs, do not be surprised if silver does not fall as much nor that it will outperform gold in the next leg of the rally higher.
Sentiment also reflects this. Silver's DSI is at 41 compared to gold's 65. It hit a lower low of 16 compared to gold's 21. Silver's 21-day moving average DSI is "still" at its low of 29, whereas gold's has already risen from its low of 32 to 36. But silver's 21-day moving average is also hitting higher and higher lows and from a deeper base…
Positioning clearly favors silver over gold. The banks never got long gold ahead of its rally. They did in silver. Funds were also heavily short silver, not so in gold. This is a tweet I posted last Friday:
Although silver has underperformed gold to this point, expect that to change once gold peaks.
With respect to the miners, the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) is now extremely overbought on the RSI (75) and both MACDs. It is also approaching a critical resistance zone at the prior highs between 23.35-23.70. This also signals a healthy pullback is coming.
Thank the Fed for this rally which is nowhere near done yet. My primary scenario for the bottom and rally in the metals and miners for well over a year now has been a Fed reversal in policy to rate cuts and ultimately QE, causing the peak and fall of the dollar. Although they have done nothing but talk about it so far, market expectations for such a reversal are already priced in, hence the rally that has just started.
I forecasted in a previous article back on February 1 that gold would go to $1,400 plus this year. I stand by this forecast. Hence, why I began this article by recommending you don't try to short this rally, it's buy-the-dips time.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.