The price analysis last month concluded that the market might have seen capitulation. It suggested the FOMC and GDP could spark a short squeeze based on the overly bearish COTs report. While gold rebounded strongly, it ran into stiff resistance and more hawkish talk by the Fed. With a large pullback from recent highs, is gold about to fall through another floor, or is it building support within the old range of $1750-$1800 where it was trapped for months?
Gold has broken through $1800 at least 10 times over the last two years, sometimes in an explosive fashion. Each time, gold eventually runs out of steam and falls back below. $1750 has been even stronger support though, with fewer breakthroughs and smaller moves. $1800 may not be comfortably in the rearview mirror until $2100 is taken out. For now, gold is back in the consolidation range of $1750-$1800.
Silver has been more volatile and fell through strong support at $22 back in May. Even when gold rebounded, silver was unable to muster enough strength to get its momentum back.
Outlook: Bearish until $22 is taken out
Figure: 1 Gold and Silver Price Action
The false breakout in gold can be clearly seen below with a big move of the 50 DMA above 200 to only get ripped back down. With current price ($1763) falling below the 50 DMA ($1782) this week and well below the 200 DMA ($1842), momentum is down.
Figure: 2 Gold 50/200 DMA
Silver is similar to gold with the price ($19.07) also falling back below the 50 ($20.02) and 200 ($22.69) DMA.
Margin rates in gold are near two-year lows, but this has done little to spark interest. Open interest is also at multi-year lows. This suggests dry powder is ready to ride the next big move in either direction. When open interest gets this low it generally means the next move is up.
Figure: 4 Gold Margin Dollar Rate
The COTs report shows positioning in silver is still net short in Managed Money. This is a combination of multi-year lows in gross longs and multi-year highs in gross shorts. This suggests that shorts have taken advantage of the lower margin rates. Any increase in margin could create a forced liquidation in shorts.
Figure: 5 Silver Margin Dollar Rate
The gold miners have been very consistently leading the price of gold in both directions. The recent price jump above $1800 was not confirmed by the miners. The last time gold was above $1800, the miners were much higher. This past week showed another poor showing by the miners indicating there may be more downside ahead in gold in the next few weeks.
Figure: 6 Arca Gold Miners to Gold Current Trend
Looking over a long time horizon shows how badly the miners have underperformed gold over the last decade. This shows traders have never confidently bought into any gold momentum, anticipating price advances will be short-lived. When this trend reverses, gold could start flying higher being led by a surging mining sector.
Figure: 7 Arca Gold Miners to Gold Historical Trend
Love or hate the traders/speculators in the paper futures market, but it’s impossible to ignore their impact on price. The charts below show more activity tends to drive prices higher.
Trade volume in gold is near the lowest in years and is due for a rebound. Silver is closer to average but the COTs report suggests this is probably driven by the short side. Until the shorts start to get squeezed in silver, this looks more neutral than bullish.
Bullish Gold and Neutral Silver
Figure: 8 Gold Volume and Open Interest
Figure: 9 Silver Volume and Open Interest
Price action can be driven by activity in the Treasury market or US Dollar exchange rate. A big move up in gold will often occur simultaneously with a move down in US debt rates (a move up in Treasury prices) or a move down in the dollar.
Figure: 10 Price Compare DXY, GLD, 10-year
The dollar has been on an absolute tear for months now (orange line above shows the inverse move). The DXY burst through resistance at $105 and reached as high as $109 in July. After a brief correction, the DXY is once again moving up with a massive move this past week. If the DXY breaks through the recent high, then it could create more trouble in the gold market.
Outlook: Bearish if dollar breaks through
Gold and silver are very highly correlated, but do not move in perfect lockstep. The Gold/Silver Ratio is used by traders to determine relative value between the two metals. Historically, the ratio averages between 40 and 60, so outside this ban can indicate a coming reversion to the mean.
Silver is definitely outside the band which means either gold will fall or silver will need to catch up.
Outlook: Silver VERY Bullish relative to gold
Figure: 11 Gold Silver Ratio
The table below shows a snapshot of the trends that exist in the plots above. It compares current values to one month, one year, and three years ago. It also looks at the 50 and 200-daily moving averages. While DMAs are typically only calculated for prices, the DMA on the other variables can show where the current values stand compared to recent history.
After the recent rebound from oversold conditions, gold and silver are once again sliding. The charts above are certainly more bearish which means caution is warranted. That being said, the data could suggest a bottom is forming, and $1750 has proven even more problematic for the bears than $1800 has for the bulls.
Figure: 12 Summary Table
Gold and silver were extremely oversold last month and saw a mini short-squeeze on the heels of the FOMC meeting and GDP. The analysis last month alluded to this possibility. Unfortunately, the move-up ran out of steam as the market anticipated more time before a Fed pivot. The path now is much less clear. Gold could be range bound again between $1750-$1800. Or, a hawkish Fed at the Jackson Hole summit could potentially crack $1750 and open up the door for new lows. The gold miners are definitely anticipating this!
On the flip side, the economy is clearly in recession and the Fed is moving very quickly. It will likely be a few more months before they see the initial impact of the damage they are inflicting, much less the full impact. The damage in their wake could be catastrophic to the overleveraged US economy. When the damage does become apparent, the Fed will reverse course very quickly. The Treasury also needs this quick reversal or interest on the debt will imminently exceed $500B a year.
In the short-term caution is warranted until gold can get past $1800 with confidence, probably requiring prices above $1850 for an extended period. Silver is in a similar boat, lacking momentum and needing to recapture $22 to then begin another run at $25 and even $30.
Long-term investors should not be discouraged by the current shakeout in the metals. The medium-term is far more bullish. The Fed has a very short runway to get inflation back below 3%. Each month that runway gets shorter. The faster they move the more damage they will inflict before they even know what happened. A fed pivot isn’t a matter of “if” but “when”. As the pivot becomes obvious, gold and silver will start to move up quickly.
Data Source: Futures & Options Trading for Risk Management - CME Group and fmpcloud.io for DXY index data
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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