What Is Money Flow Telling Us About The Price Direction Of Gold And Silver?

Includes: GLD, SLV
by: Scott Gibson

Currently, money is flowing out of the silver Exchange Traded Fund, (NYSEARCA:SLV) and the gold Exchange Traded Fund, (NYSEARCA:GLD).

Gold and silver bugs watch pronouncements by central banks describing their gold reserves in order to gain a clearer picture of the future price of the metals. But is there an easier way to decipher the future price direction of these precious metals than reading every pronouncement of the central planners at the central banks of the world. I mean will reading another article about the Federal Reserve's views on gold and or whether China or India are buying or selling precious metals because of weakness or strengths in their economies really clarify which way the metals are headed next?

Maybe there is a better way. I suggest that a couple of simple charts with several measures of money flow are a much better predictor of the immediate short-term direction of price than all of the releases by central banks concerning their precious metal holdings. These charts can clarify whether we should be long or short in gold and silver.

The two charts below use the 20-day moving average of price along with a measure of On Balanced Volume and Volume Momentum to gain a clear picture of the price direction. The 20-day moving average is shown as the middle line in the Bollinger Band plot on each chart. The 20-day moving average is the grey plot. On Balanced Volume is based upon the idea that volume is higher on days where the price move is in the dominant direction, for example in a strong uptrend we should see more volume on up days than down days. Volume momentum merely multiplies price movement over a fixed time frame times the current volume.

The first chart below is of the Exchange Traded Fund GLD, which tracks the price of gold.

(Click on the charts to see an expanded view)

The next chart shows the Exchange Traded Fund SLV, which tracks the price of silver.

As I pointed out in my last article on precious metals, gold and silver are headed lower over the short term. Support levels suggest that gold will trade down to somewhere south of $1500 per ounce before finding support and silver will sell down to below $25 before finding support. Once they have completed the current consolidation, we should expect to see another rally in both.

Disclosure: I am long SLV, GLL, ZSL.