The Technical Picture: Can the Metals Hold Support?

The price analysis last month suggested that more time was needed for a sustainable rally. It concluded:

It looks like this market will turn sooner or later. Still, though, support has become resistance so the market has some work ahead of itself. Medium to long-term investors should feel very confident buying at current prices, even if the price action remains choppy in the short-term.

The metals market saw a strong bounce in the wake of weaker than expected CPI even though inflation is still annualizing more than 5%. The assumption is the Fed will tone down the aggressive talk. The market is now back in the lower side of the range it was stuck in for months ($1750-$1800), finishing the week at $1752. A look at the data can provide hints as to whether $1750 can hold.

Resistance and Support

Gold

Gold was recently trapped below $1700 after carving out very solid support at the level for the past two years. Regaining $1700 is a positive turn, especially with the explosiveness of the move. That said, $1800 has proven to be a much harder hurdle to hold above. At $1750, it sits right in the middle of what was once very solid support and solid resistance. A move through either could create a snowball effect.

Outlook: Neutral

Silver

Silver briefly got above $22 but was unable to hold it. Similar to gold, at $21, it now sits right in the middle of what used to be very strong support ($20) and resistance ($22). Still, getting back above $20 is a positive sign after spending several months trapped below. It needs to hold $20 to stay cautiously bullish.

Outlook: Cautiously bullish until $22 is taken out with conviction

Figure: 1 Gold and Silver Price Action

Daily Moving Averages (DMA)

Gold

It’s bearish that the 50 DMA ($1684) is well below the 200 DMA ($1807); however, the size of the move suggested a mean reversion was probable (as noted last month). That reversion has occurred but run out of steam. It’s hard to get excited without a new golden cross forming.

Outlook: Neutral to Bearish

Figure: 2 Gold 50/200 DMA

Silver

Silver has been leading gold in the recent move. The price even got above the 200 DMA ($21.50) and sits comfortably above the 50 DMA ($19.72). If it can build on recent gains then a golden cross could form in the coming weeks. Until then…

Outlook: Neutral

Margin Rates and Open Interest

Gold

Open interest was above 500k for a single day on Nov 11 before spiking back downwards. With open interest still at very low levels, there is plenty of room for the market to move up strongly if it were to regain momentum.

That said, margin rates have also come down to the lowest levels since 2020. This gives the CME plenty of room to jack up margin rates and cap any move.

Outlook: Neutral

Figure: 6 Gold Margin Dollar Rate

Silver

Silver is similar to gold with Open Interest sill very low along with low margin rates. As seen in October, it does not take much for an increase in Margin to have negative effects on price.

Outlook: Neutral

Figure: 7 Silver Margin Dollar Rate

Gold Miners (Arca Gold Miners Index)

The gold miners have been consistently leading the price of gold in both directions for years. The current move in the miners is stronger than it was back in August when gold even got above $1800. While the sector was very oversold, it’s a positive development that the ratio has rebounded so strongly. This means stock traders are expecting the price advance to continue.

If the GDX can break back above $30 it could be a very bullish signal for both the metal and the miners. It got as high as $28.64 this week before coming back down to close at $27.37.

Outlook: Bullish

Figure: 8 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: 9 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.

Volume in both metals has picked up in recent weeks as interest has returned to the metals. If momentum continues, it could drive prices higher. Furthermore, if investors continue to dump Bitcoin in the wake of the FTX disaster, they will turn their attention back to a real inflation hedge (gold and silver). Increased attention and volume would drive prices higher.

Cautiously Bullish in Gold and Silver

Figure: 10 Gold Volume and Open Interest

Figure: 11 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: 12 Price Compare DXY, GLD, 10-year

The dollar and bond yields have crashed in recent weeks which was one of the main drivers for gold going higher. the DXY finished the week below $107 after getting as high as $113 in early November. This is a dramatic move but is also not surprising given how lopsided the trade was. Everyone was long the dollar!

The recent move in the dollar and bonds has been fast and furious; however, both markets held up this week. The Fed will no doubt drive the next big move in both. A drop below $105 in the dollar will be a very bearish sign. The bond market is much more complicated as the Fed can directly intervene to affect rates.

Outlook: Neutral until the dollar breaks below $105

Gold Silver Ratio

The gold-silver ratio has been quite volatile of late, surging during the sell-offs, but reversing when gold and silver catch a bid. Silver has been leading gold, but that reversed in the latest week. Regardless, the ratio is still historically high.

Outlook: Silver bullish relative to gold

Figure: 13 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.

The recent month is showing positive signs compared to the lookback from one year ago.

• The HUI Gold ratio is up 10% in the last month, but still down from a year ago
• Open Interest is also up 6.3% from last month but down 23.6% from last year
• Both prices are up by large amounts over the month: 7.2% in gold and 12.3% in silver

Figure: 14 Summary Table

Wrapping up

This analysis is far more neutral than it has been in the past. This is reflected in the price action as both metals are stuck between longer-term support and resistance.

The precious metals market still lacks confidence. The paper traders are hanging on every data point that could influence the Fed’s decision. At some point soon, the Fed will pivot which will cause a massive surge in prices for both. That is when higher inflation numbers will drive metal prices higher instead of lower.

Until the next Fed move is clearer, the metals are likely to remain choppy. That could change if the demand in the physical market overwhelms the paper market before the path of the Fed is clear.

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

Data Updated: Nightly around 11 PM Eastern

Last Updated: Nov 18, 2022

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