Will Gold Blast Through $1900 on a Brainard Nomination This Weekend?
Gold finally broke through the $1,800 resistance after yet another sizzling hot CPI read. Could $1,900 be next?
The analysis last month and the month before showed that a breakout in the price of gold looked to be very close.
Gold took out $1800 and then sliced through $1835 without much effort. After a big move, gold will typically rest and consolidate before moving on. This week, gold has looked more like a prisoner trapped in a box than a weary traveler looking to recharge.
For 8 days in a row, gold smacked its head on $1865-$1870 only to be turned back down. Every drop has been bought immediately for another try. Remember the last 5 months where gold traded between $1750 and $1800? When gold was turned away from the high it would take weeks to try again. Instead, it has been hours between retests. Its head must hurt from banging it so many times in such a short window.
The data below lays out a bullish picture in both gold and silver (more bullish for gold). The catalyst for the continued move higher may be days away. Biden said he would nominate a Fed Chair this Saturday. Why Saturday? If the pick was Powell, the markets would yawn and move on. It’s Saturday because maybe Biden wants to give the market time to digest the news of a new Fed chair. Brainard got as high as 40 cents in the betting markets this week and currently sits at 38. For reference, she was at 14 cents on Nov 4.
Why does it matter though, isn’t Powell a super dove? Yes, he is. But Brainard is more so. She is even less worried about inflation than Powell. With the house just passing another $1.75T spending bill, Biden and the Democrats need easy money to keep flowing. Brainard will ensure this happens.
Even if Powell stays put (currently the likely outcome), it won’t matter. Maybe the market sells off some on Monday, but the perfect storm is brewing in Precious Metals. Debt is spiraling with soaring deficits combined with out-of-control inflation; the Fed Balance Sheet is still growing and the Money Supply continues to expand, all while Hedge Fund selling looks to have bottomed.
On top of all these factors, the technical indicators look even more favorable. Let’s take a look…
Resistance and Support
As mentioned, gold ran into a brick wall at $1870, but the metal seems to be showing no patience. Eight trading days in a row gold has attacked resistance. Buyers are jumping in to buy every dip. It took 5 months to exhaust the sellers at $1800, it looks like the sellers may be exhausted at $1870 far quicker.
Too many failed attempts can become a bearish indicator, but the tenacity of this move is looking far more bullish than bearish. It’s possible all the bad news is priced in and gold has a lot of wind behind it.
Outlook: Very Bullish
Silver followed a similar trajectory up but is range-bound in a wider window between $25 and $25.50. It has not been smacking its head repeatedly on the ceiling like gold, but it has also not tested the lower range with too much ferocity.
This pattern looks a bit more like a normal consolidation, but chances are that it will follow gold in the next move. How will silver catch up? Check the gold/silver ratio below.
Outlook: Bullish but with a weaker consolidation
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
The 50 DMA is sitting only $4 below the 200 DMA. Without a major pullback in gold, this looks ready to flash a golden cross within days. The current setup looks a lot like summer 2019 when gold went from $1275 to $1350 before taking off to $1550 over two months.
Figure: 2 Gold 50/200 DMA
Silver has more work ahead as the 200 DMA is almost $2 above the 50 DMA. Silver has closed the gap fairly quickly though, having been separated by as much as $2.30 in mid-October. The pattern below looks very similar to the pattern in July 2020 before silver took off. However, until the golden cross emerges, this is technically a bearish pattern.
Outlook: Bearish but moving in the right direction
Figure: 3 Silver 50/200 DMA
Comex Open Interest
The two charts below show the open interest compared to the price in both gold and silver. The overlap is not perfect, but major moves in one generally occur in tandem with the other as speculators push and pull the price around with paper contracts.
Open interest exploded higher as soon as gold crossed $1800. It rose from 511k to 620k within a matter of days. Gold open interest has not been this high since March 2020 and even surpassed the high seen last July before gold reached $2000.
Note: Gold open interest topped out at 604k on July 27, 2020, more than a week before gold closed at $2069 on Aug 6 where open interest had fallen to 546k
Because open interest typically leads price moves, this chart is very bullish as traders seem positioned for a big move higher. Unfortunately, if they don’t get it they could leave in a hurry. Until then, this chart looks very promising.
Outlook: Very Bullish
Figure: 4 Gold Price vs Open Interest
Silver saw a similar spike up in open interest, but not nearly to the same degree. At 155k open contracts, it sits below the Aug 12, 2021 high of 160k. This is still well below the 207k seen last Aug when silver was topping out on its explosive move up.
Outlook: Moderately Bullish
Figure: 5 Silver Price vs Open Interest
To evaluate the true relationship of open interest and price action, the table below calculates the correlation between the two. The methodology takes the percentage change over a specific period and then calculates a correlation across multiple periods between the two variables.
Figure: 6 Price/OI Correlation
As shown, the current 21-day correlation is extremely high in both gold and silver. There is no lead or lag in this instance, so “correlation is not causation” (i.e. are traders jumping in because of the price move or is the price move driving traders in?). While the momentum is clearly bullish, people should take note that the traders can leave just as fast as they came. A bad trading signal could reverse the action very quickly.
Many times, the movement in the mining companies precedes a move in the metal itself. Stocks are forward-looking and the sell-off or price spike in the miners indicate the market anticipating the future movement in gold. Below are two charts showing the historical and more recent trends.
Historically, the HUI is extremely undervalued. The HUI would have to increase 4x to reach the highs seen in the 1990s and 2000s. The sector has never really recovered from the gold price sell-off in 2008.
Figure: 7 HUI to Gold Historical Trend
Looking at the more recent trend shows how the miners typically lead the price movement in gold (e.g. Mar 2020, July 2020, Mar 2021, May 2021, Aug 2021, Oct 2021). There are exceptions such as April 2020, but lately, the gold stocks are front running the price moves in gold.
The Gold/HUI ratio looks to have bottomed on Oct 1. It has moved up in a big way since. This led the recent price surge experienced in the last few weeks. Unfortunately, the mining companies have stalled out, hitting major overhead resistance. The GDX has run into a wall at $35 an ounce.
While it is not falling much (currently around $34.25), it has been unable to break resistance. This means the traders are less confident about the near-term price movement in either direction. While not bullish, it also does not look bearish. Furthermore, the last time gold was trading this close to $1900, the GDX was more than 10% higher at $38-$39. Gold traders are still skeptical of this move in gold.
Figure: 8 HUI to Gold Current Trend
Love or hate the traders/speculators in the paper futures market, but it’s impossible to ignore the impact they have on price. The charts below show that the more active they are, the more prices tend to move up.
At first, it was thought that volume may start to increase after Labor Day marked the end of summer. Unfortunately, volume stayed low up until recently. It appears that traders were waiting for the metal to break out of the $1750-$1800 range.
The silver chart below looks to make more sense. Given the massive move up in open interest for gold, you would expect the price to be higher. Perhaps this explains the recent action where every dip is bought aggressively as the metal is determined to smash through $1870. Silver seems to be waiting on gold’s lead.
Gold: Very Bullish. Silver: Moderately Bullish
Figure: 9 Gold Volume and Open Interest
Figure: 10 Silver Volume and Open Interest
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. This relationship can also be seen over longer time periods as the chart below demonstrates. While gold magnifies the move, the pops and dips tend to move in the same direction.
The chart below shows that gold (green line) and the inverse dollar (blue line) have started to diverge dramatically in recent weeks. This was noted last month, but the divergence appeared more against bonds than the dollar. Rates and the dollar are both moving up while gold is surging.
Please note: IEF is the 7-10 year iShares ETF (a move up represents falling rates) and the Dollar return is inverted in this chart to show a positive correlation. They are also plotted on the right y-axis to better show the price movement.
Figure: 11 Price Compare DXY, GLD, 10-year
What started as a micro trend in October, has really amplified in November. Surging gold price along with a surging dollar is very atypical. This also means that in foreign currencies, the recent move in gold will appear even bigger.
The only explanation is that one group of traders is wrong. The bond and currency markets are significantly larger than the gold market. This implies far more traders are betting on dollar strength and rising rates compared to those betting on higher gold prices.
This trend will most likely reverse at some point. Either currency/bond traders are wrong or gold traders are. It’s great to see such strength in gold, but that is a minority position. In betting markets, the majority is usually right. For that reason, this trend started as very bullish but is starting to look bearish if the dollar doesn’t roll over soon.
Gold Silver Ratio
Gold and silver are very highly correlated but do not move in perfect lockstep. The Gold/Silver Ratio is used by traders to determine the relative value between the two metals. Historically, the ratio averages between 40 and 60, so outside this ban can indicate a coming reversion to the mean.
While silver had made up ground since last March, a major reversal occurred on July 2 bringing the ratio from 67 up to 80. Sudden moves like this typically reverse quickly. Silver saw the beginning of this reversal in October, but it still has a long way to go. With the ratio at 74, the next move favors silver.
Because silver amplifies the move in gold and typically follows and then leads, this is bullish for both metals. That being said, in this instance silver looks more bullish relative to gold.
Outlook: Silver Bullish relative to gold
Figure: 12 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 stack compared to recent history. For example, open interest in silver is sitting above the 50 DMA but below the 200 DMA. Gold is above both.
- Gold and silver prices are up 4.3% and 1.9%
- Again, gold has led silver here
- The HUI Gold ratio only increased by .4% and is still down from last year
- Both metals are seeing higher volume
- The open interest ratio in both metals has increased over the last month
- This shows the price move has not been as large as the increase in open interest
Figure: 13 Summary Table
The only thing really bearish is how bullish the current setup seems. The last 10 years have been filled with disappointment and false breakouts. Could this be another one?
The last two months showed a breakout was imminent, but the sentiment was also very low in the market. Sentiment has improved dramatically which may mean the buyers are nearing fatigue just like the sellers were a month ago.
The technical charts all look bullish, but the metals are notorious for disappointing traders. Will this time be different?
Obviously, no one can predict where the price of gold and silver are going in the future. Many articles in the Exploring Finance series look at the fundamental cases that theoretically should drive prices higher in the medium to long term. This analysis looked at some of the short-term drivers and showed how open interest is a major factor in the price of gold and silver regardless of what may be occurring elsewhere.
The two biggest takeaways from this analysis are:
- Gold successfully broke through $1800 to set up a year-end rally. It has hit major resistance at $1870 but seems compelled to break through. Dips are bought aggressively. It needs a catalyst to blast through, could that catalyst be a Brainard nomination this weekend? A Powell renomination could see gold testing $1835 next week.
- The gold and bonds/dollar divergence accelerated in November. This is a major development that must be watched closely going forward. What looked like a very bullish setup has grown something to be cautious about due to the magnitude of the divergence. One group of traders is wrong…
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11 PM Eastern
Last Updated: Nov 18, 2021
Gold and Silver interactive charts and graphs can be found on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/