The Technicals: Short-Term Caution, Medium-Term Bullish

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 October highlighted that a lot of metrics looked bullish, the one concern was whether the price action had gotten too far above the moving averages. The market held up okay over the last couple months despite a nasty correction after the election.

The metals have built a great base from which to launch from in the next leg of this bull market. That said, the immediate indicators are giving mixed signals making it hard to determine the immediate move. In the short-term, the data leans slightly bullish, but not convincingly so. Medium to long term is still very bullish.

Price Action

The metals are diverging somewhat here. The gold market is looking to make another run at an all-time high while silver has not been able to get its momentum back. If gold punches through then it could mean a quick advance to $3000. Silver will likely follow golds lead here.

Outlook: Slightly 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. As mentioned in the intro, gold has had time to consolidate between $2600 and $2800. The ability to hold $2600 looks like it is setting up for a move higher.

Outlook: Bullish

Figure: 2 Gold 50/200 DMA

Silver

Silver is in a similar situation, but the path has been more volatile. The 50 DMA remains above the 200 DMA, so we are in a bullish setup. Silver is not stretched by any means and has held up will under recent price pressure.

Outlook: Slightly bullish

Figure: 3 Silver 50/200 DMA

Comex Open Interest

Gold

This is an area for concern. The pop in open interest suggests the market might be slightly overbought in the short-term. This may warrant a pullback, but unlikely to be severe.

Outlook: Bearish

Figure: 4 Gold Price vs Open Interest

Silver

Silver has not seen a similar move in open interest which suggests there could be cash on the sidelines to fuel a bullish move if it were able to get a little momentum. If gold makes a move up, expect a quick gap up in silver.

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 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.

Outlook: Bullish

Figure: 6 ETF Analysis

Silver

Similar to gold, retail silver investors are just now dipping their toe in the water. This is a stealth bull market that has plenty of room to keep moving higher.

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 since March 2021. 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 very briefly in November. There is still room to push Margin rates higher if the price were to find strength, but similar to gold, it’s possible that does not dent the upward momentum. TBD on this one.

Outlook: Neutral

Figure: 9 Silver Margin Dollar Rate

Gold Miners

The gold miners have been consistently leading the price of gold in both directions for years. The GDX got slammed in the pullback from the election. While gold has recovered, GDX is still well below the top from October. It has been catching up since Jan 1, but still has a long way to go. Traders are feeling more confident.

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 gold price takes off.

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 been driven by elevated volume. This is nothing above average so should not be concerning. That said, this doesn’t have a bullish tilt either.

Outlook: Neutral

Figure: 12 Gold Volume and Open Interest

Silver has not seen elevated trade volume meaning the market is being largely ignored. This is a bullish set up.

Outlook: Bullish

Figure: 13 Silver Volume and Open Interest

Conclusion

The data paints a somewhat mixed picture. The market has had time to consolidate. Some aspects look slightly overbought in the immediate term, but the price of gold has held up very well despite excessive headwinds. The sell-off in GDX was not matched by a sell-off in gold. This is likely a good sign over the medium term. Even if we do see a short-term pullback, it’s likely a new all-time high will be coming soon in gold. Silver is poised to follow.