Price Analysis: Support Becomes Resistance

The price analysis last month titled Caution Warranted in the Short Term, highlighted the potential risk in gold and silver after a rough July and early August. It concluded the path was much less clear. There were two possible paths forward: 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. As it turns out, it was the latter. The gold miners are definitely anticipating this.

The hawkish Fed showed up in Jackson Hole and again on Wednesday sending the metals tumbling. After a brief short-covering rally late this week, gold found new lows Friday led by the miners. The market is now oversold which could lead to a short-term bounce. However, any rally is unlikely to gain momentum until a Fed pivot is clearly in view (or the physical market breaks). Luckily for the gold and silver bulls, the pivot will come into view sooner than anyone currently anticipates.

The Fed has talked tough and backed it up. However, they have likely already broken something and the data hasn’t shown it yet. They are moving so quickly that by the time the cracks show up in the data, it will be too late. The Fed will be dealing with an economy on the brink of disaster. Then what?

For now, the Fed has room to keep chugging along. The data looks okay, the Fed has stated they will accept a bumpy landing, and the market is selling off but not crashing. Thus, the metals continue to slide. So, what does the data show lies ahead?

Resistance and Support

Gold

Gold broke down below $1700 and is barely hanging onto $1650. The shorts smell blood and are pushing the longs to trigger stops. If it happens, the market could see the metal trade in the $1500s. $1750 is the new hard ceiling gold needs to break through. Until then, pressure is down.

Outlook: Bearish

Silver

Despite a rough Friday, silver has held up much better than gold. That being said, silver has been having trouble with $20, but real resistance lies at $22.

Outlook: Bearish until $22 is taken out

Figure: 1 Gold and Silver Price Action

Daily Moving Averages (DMA)

Gold

It’s bearish that the 50 DMA ($1743) is well below the 200 DMA ($1831); however, the market rarely goes in one direction without a pause. Expect a short-term bounce. The bounce cannot be trusted until the current price ($1655) at least breaches the 50 DMA and more likely the 50 DMA needs to break the 200 DMA to confirm a new bullish trend.

Outlook: Bearish

Figure: 2 Gold 50/200 DMA

Silver

Silver is slightly different with the current price ($18.91) sitting just below the 50 DMA ($19.25). It had popped above it a few times this week but could not hold. The 200 DMA of $22.10 is still a bit further off.

Outlook: Looking for a trend change

Margin Rates and Open Interest

Gold

Open interest is at multi-year lows, and likely only increasing slightly in recent days due to shorts entering the market. This means there is ample dry powder on the sidelines to get behind a long move when it comes.

That being said, margin rates in gold are $5700 (3.45%) which is the lowest since March 2020. This has actually led to increased short positions as speculators look for leverage on their outlook.

The CFTC does not typically raise margin rates on the shorts (this could induce a short squeeze). The CFTC uses margin rates to cap any price advance. Thus, while there is cash on the sidelines to drive a long move, it will be restrained by the CFTC.

Outlook: Neutral

Figure: 4 Gold Margin Dollar Rate

Silver

The situation in silver is very similar to gold. The COTs report shows positioning in silver is still net short in Managed Money. Margin rates and open interest are both very low.

Outlook: Neutral

Figure: 5 Silver Margin Dollar Rate

Gold Miners (Arca Gold Miners Index)

The gold miners have been very consistently leading the price of gold in both directions. The beginning of this week showed a potentially positive sign as the miners were holding up fairly well in the wake of pressure on the metal. Unfortunately, the dam broke and the miners reached new lows for the move. Relative to gold, the miners are now at the lowest level since Feb 2016. The sector is definitely trying to bottom, but it’s hard to catch a falling knife. Wait for a clear trend change.

Outlook: Bearish

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

Trade Volume

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. This was invalidated in the recent month, as the volume was driven by shorts.

In either case, volume in both metals shows a general lack of interest. Another indicator of a potential bottoming. The next surge in volume could create a short squeeze when it happens, but that does not look imminent.

Neutral Gold and Neutral Silver

Figure: 8 Gold Volume and Open Interest

Figure: 9 Silver Volume and Open Interest

OTHER DRIVERS

USD and Treasuries

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 continues to rip higher making new multi-decade highs this week, breaking through $113. Rates are also exploding higher, denting gold’s appeal. Once again, this is bearish momentum, but it shows a market where everyone is on one side of the trade.

Outlook: Bearish until the dollar reverses

Gold Silver Ratio

One glimmer of hope in the data is the recent fall in the gold-silver ratio. Besides the Covid-induced surge in 2020, the ratio had topped at the highest level in years. Silver finally saw strength relative to gold, despite an ugly Friday. If silver can keep the momentum going, it could turn the sector around.

Outlook: Cautiously optimistic

Figure: 11 Gold Silver Ratio

Bringing it all together

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.

Both metals continue to slide and the metrics don’t look great.

• • The HUI Gold ratio dropped 6.5% this month and is down 20% from a year ago
  • Silver open interest fell another 6.5%, but the price held up well dropping only 0.3%
    • • The gold price dropped 6% which drove the improvement in the gold silver ratio of 5.7%

Figure: 12 Summary Table

Wrapping up

When everything is so lopsidedly bearish, it can be a sign of capitulation. That said, beware of trying to catch a falling knife. Because of the technical drivers in gold and silver, moves tend to extend beyond what seems possible as momentum carries the move forward. The market is due for a bounce, but will it be a dead count bounce or something with legs?

The paper market is driving prices and the spec traders don’t see a Fed pivot anywhere, which suggests more time before a turnaround. However, anyone tracking the physical market should realize that paper shorts are playing with fire. Gold and silver are flooding out of Comex Registered at an unprecedented pace. The physical market can see the Fed pivot. At this pace, the paper market might not even need to see the pivot to induce the mother of all short-squeezes that will send both gold and silver to new all-time highs.

While there could be choppy or downside action in the weeks and months ahead. The fundamental picture will win out. Long-term, physical investors should not time the market but should capitalize on prices that may never be seen again.

Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data

Data Updated: Nightly around 11PM Eastern

Last Updated: Sep 23, 2022

Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/