The Technicals: Gold Price Does Not Look Frothy
This analysis attempts to look at different metrics to understand the current momentum in the gold and silver markets. It is meant as an analysis on potential price direction in the very short-term (a few weeks to 1-2 months).
The last technical analysis in January highlighted that the outlook was bullish but that there could be some short-term choppiness. It seems that gold sliced right through that choppiness, getting to new all-time highs recently.
In the latest analysis, all the indicators support a healthy market without too much froth. There could be some profit taking, but don’t expect deep pullbacks.
Price Action
Gold and silver are moving in lock step YTD with both metals breaking through key resistance areas recently. Gold broke through $3000 to new all-time highs. Silver got back above $35 on the back of the Fed statement. We may see some profit taking in both metals, but it will be short lived. There is a strong foundation to keep propelling prices higher.
Outlook: Bullish
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
Gold
The 50 DMA has been above the 200 day for over a year now. This confirms the bullish trend is intact. The price has pulled away from the 50 DMA which may lead to some consolidation in the short-term but overall, the market looks strong.
Outlook: Bullish
Figure: 2 Gold 50/200 DMA
Silver
Silver is in a similar situation, but the path has been more volatile. It tends to spike higher above moving averages with sharper pullbacks. Even if it does pull back down to the 50 DMA (around $32.18) it should bounce back.
Outlook: bullish
Figure: 3 Silver 50/200 DMA
Comex Open Interest
Gold
The price has been propelled higher despite open interest remaining relatively average. The futures market is not over extended here which leaves room for momentum traders to get on board in the short-term. Even when the futures have sold off, it has not brought prices back down in big ways. This is all very bullish.
Outlook: Bullish
Figure: 4 Gold Price vs Open Interest
Silver
Silver open interest is slightly more extended than gold because it is slightly above the 3 year average. Silver has a little less room for the futures market to push it higher but it’s not over extended either.
Outlook: Slightly Bullish
Figure: 5 Silver Price vs Open Interest
ETF Shares Outstanding
GLD and SLV are the two most popular ETFs that track Gold and Silver. While institutions will buy these funds, this data generally shows retail interest. the chart shows the price and shares outstanding. Shares outstanding is the metric that shows overall retail interest.
Gold
Retail is still sitting on the sidelines during this bull market. They have been net sellers of GLD since gold hit $2000 during covid. This indicates smart money has been buying. Retail will jump in eventually, but that is usually a sign the market is getting frothy. We are far from that point with only a slight uptick recently.
Outlook: Bullish
Figure: 6 ETF Analysis
Silver
SLV has actually seen net selling since the start of the year which indicates they are completely absent during this bull run.
Outlook: Bullish
Figure: 7 ETF Analysis
Margin Rates and Open Interest
The CME uses margin requirements to pull momentum out of the futures market. This is usually done to halt explosive up moves and contain them, but can be used in quick bear markets as both shorts and long are subject to margin requirements. Margin increases force traders to put up more capital or sell off contracts to meet requirements. Managed Money (see CoTs report) are more sensitive to margin increases as they tend to be more levered and capital constrained, so margin increases typically force them to liquidate positions (if they are long prices go down as they sell and if short prices go up). More often, traders are long and higher margin causes forced selling.
Gold
Margin rates have been pushed to their highest level on recent record. The CME does not have much room to raise margin requirements much higher. Furthermore, the increases have done very little to restrain the current move.
Outlook: Bullish
Figure: 8 Gold Margin Dollar Rate
Silver
The last Margin increase came in February to bring rates up slightly. Rates are still below recent highs; however, similar to gold, the higher rates have done little to dent the price. Still, there is room for rates to move higher so maybe slight room for caution.
Outlook: Neutral
Figure: 9 Silver Margin Dollar Rate
Gold Miners
For short-term moves, the gold miners have been consistently leading the price of gold in both directions for years (i.e., if GDX starts selling off it usually indicates gold will come under pressure). The GDX got slammed in the pullback from the election and gold followed suit. Despite this relationship, the miners have a harder time recovering from big sell-offs. It leads in direction, but not in magnitude. For example, while gold has shot past all-time highs, GDX has only just reached the October levels.
Right now, GDX has been strong indicating that there seems to be momentum behind the gold market.
Outlook: Bullish
Figure: 10 Arca Gold Miners to Gold Current Trend
The chart below shows the longer-term historical relationship. The miners have been absolutely punished over the last decade as stock traders have never bought into the current move in gold. That leaves these stocks deeply undervalued and set up for an explosive move when the stock traders accept the big move up in gold is not a quick head fake.
Figure: 11 Arca Gold Miners to Gold Historical Trend
Trade Volume
The final indicator is trade volume on the CME. This is related to, but not exactly tied to open interest. Higher trade volume with flat open interest can mean churn. Higher trade volume can also be met with increases or decreases in open interest if buyers or sellers are in control.
In gold, the new high prices have NOT been driven by elevated volume. It’s quite shocking to see how normal the market looks as the price has exploded higher this year.
Outlook: Bullish
Figure: 12 Gold Volume and Open Interest
Silver is in the same boat, reaching new highs with average volume.
Outlook: Bullish
Figure: 13 Silver Volume and Open Interest
Conclusion
Gold has been on fire recently. New high is followed by a new high seemingly every month. As we stand today, the only concern in all this data is that all indicators are overwhelmingly bullish. Usually, the data shows a mixed bag. Instead:
- Price action is breaking through resistance
- Moving averages are confirming a bullish posture
- Open Interest is not frothy
- Retail is not participating
- Margin Rate increases have not slowed the price advance
- Trade Volume is not elevated or below average
- The gold miners are finally showing strength
The one thing not discussed above is the Central Bank behavior, and that is where a ton of buying has come from. Futures and ETFs are not showing a ton of activity so it’s clear that this not a frothy market ready to run out of steam like 2011. However, if Central Banks suddenly stop buying, it could cause issues.
