For the past year, gold has been battling around the $1800 psychological mark. Silver has faced a similar up and down battle near $25, albeit with more volatility.
Gold finished 2021 strong at $1830 but then a pullback happened followed by a quick rebound back above $1800 and now $1830. Will $1800 hold this time and provide support? Can silver break through $25 and unleash the bulls? Obviously, no one knows for sure, but taking a look at some indicators can provide some insight.
As of now, the consolidation gets tighter in both metals, but specifically gold. The fed meeting next week could be the spark that launches both metals through current resistance.
Table des matières
Resistance and Support
As mentioned, gold has been stuck around $1800 for months. The chart below shows that gold has made a series of higher lows and higher highs since the pullback in November. This week it touched $1848 before seeing selling pressure on Friday. It held above $1830 which has proven another major resistance point for several months. The weekly close shows promise!
If gold sees follow through next week and takes out $1850 it could be a very bullish sign, especially if $1880 falls quickly after (the November high). Falling back below $1830 could trap the price in more sideways, choppy action. A fall back below $1800 could extend the move down quite a bit. Considering the recent moves though, the bulls have a slight advantage here.
Outlook: Slightly Bullish
Silver made a very big move this past week on relatively little news. It broke through $24 but then got caught up on its way to $25. It’s still holding solid gains above $24 and looks to be resting before making another attempt at $25.
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
A golden cross formed on Dec 3 as the 50 DMA crossed above the 200 DMA. The 50 DMA is still holding above the 200 DMA, which is a good sign. Even more importantly, the current price sits comfortably above both averages ($1809 and $1803).
As pointed out last month, the two averages have grown increasingly intertwined. The closeness of these two averages has not held together like this in over a decade. This shows the extended consolidation pattern. Activity like this usually occurs before a big move. The current measures suggest this move will be to the upside. Taking out $1880 will confirm this move.
Figure: 2 Gold 50/200 DMA
Silver was turned away from its 200 DMA earlier this week but still sits comfortably above the 50 DMA. With the 50 DMA below the 200 DMA, this is still a bearish chart. That being said, a double bottom formed at $21.5. If silver takes out $25.50 it could be off to the races. Silver is too volatile to wait around. If it breaks back below the 50 DMA it could be stuck heading lower for some time. If the 200 DMA gets taken out in short order, $25.50 should fall quickly.
While the chart is technically bearish, silver has the potential to reverse here. The next week should set up the next few months. Market has not made the decision yet, so it looks like the Fed meeting will.
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 has recently rebounded quite strongly. It sits well below the November high (560k vs 620k), which gives room for a move higher before more consolidation. It’s promising to see the price climb so high despite open interest being 10% lower. That being said, given the steepness of the move, the recent flows are most likely hot money, meaning it will leave at the first sign of trouble.
Outlook: Slightly Bullish
Figure: 4 Gold Price vs Open Interest
Silver open interest is much lower than its recent history. Some of this is due to the higher price. The chart below has been modified to show notional open interest (accounts for price). As shown, it’s hovering right around the 4-year average of $19B, but well below the more recent highs of $30B. Based on the pattern, it is really at a pivot point. It was oversold last month, but that money returned. It needs new money to enter the next move up.
Figure: 5 Silver Price vs Open Interest
Most traders use margin to maximize their leverage. When Comex margin requirements are lower, it means the same dollars can get greater exposure. This tends to create more contracts and drive the price higher. Conversely, when requirements are raised, it forces traders to liquidate their positions which keeps a lid on prices. Generally, when margin is low, it can be assumed that any rally will be met with higher margin requirements to slow down a price advance.
The relationship between margin and price can be seen in the chart below, specifically in 2016 and 2020. As the gold price moved up, margin requirements increased which prompted a sell-off. Margin requirements have come down significantly in recent weeks with a big drop coming Jan 6 from $7500 to $6500.
While requirements are not at the $3100 lows, they have come down enough to give ample room for increases to halt any big move in gold. This could seriously restrain the price if any breakout occurs in the coming weeks. If margin rates were already high with a big move looming, then it leaves less room to restrain the price by increasing margin.
Figure: 6 Gold Margin Dollar Rate
The situation in silver is similar to gold. Margin requirements have come down quite a bit after the massive spike last February to restrain the price. Currently, requirements are at $9500. This is still well above the $3300 lows in 2019 so there is still room to bring margins down further. However, any big move up could be met with increased margin, halting the move.
Figure: 7 Silver Margin Dollar Rate
The price movement in mining companies tends to precede 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: 8 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 current ratio has recovered to the highest since early December on a big move this week. It has pulled back some on Friday. Part of this could be the HUI getting dragged down with the overall stock market. Gold has fared slightly better the last two days.
That being said, it’s very hard to ignore a +6% move this week in the GDX. The move gives credence to a big up move coming in gold even with some of the gains given up Thursday and Friday.
Figure: 9 HUI to Gold Current Trend
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.
After the November run-up, trade volume spiked down hard and fast. It has popped back up this week, probably driving the big price move higher. Volume tends to stay elevated for longer periods than a single week. Given next week will probably see elevated volume anyway due to the Fed, this could create another big move.
Slightly bullish in both
Figure: 10 Gold Volume and Open Interest
Figure: 11 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.
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: 12 Price Compare DXY, GLD, 10-year
The analysis two months ago highlighted how the dollar and gold were moving together (shown above as the blue and green lines converging in November). This was raised as the biggest area of caution across all the metrics because it was more likely the currency markets were correctly pricing the next move.
The dollar and gold started converging again this week as rates rose and bonds fell. Again, this is concerning when two markets are moving one way (dollar up with higher rates), and gold is moving against the trend. The currency and bond markets are much deeper than the gold market, so it likely means gold is out of line here.
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 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.
Silver closed the gap some this week. It reached a high of 81.9 in December and has since fallen to 75.3. Even with this fall, there is room for the ratio to fall further.
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 stack compared to recent history.
The charts above paint a bit of a mixed picture (bullish and bearish), compared to last month which was mostly neutral. That being said, the table below shows strong improvement across the board over the last month, but still modest improvement compared to a year ago.
- Gold and silver prices are down YoY while open interest is up slightly in gold and down 10% in silver
- Silver led the gain MoM, up a whopping 8% even with the 2% decline on Friday
- The HUI gold ratio increased 0.8% month over month but is down 8.5% YoY
- In gold, the 50 DMA volume is greater than 200. The reverse is true in silver.
- This indicates gold getting a bit more attention in the recent period
- The open interest and close price in silver both increased by 7.9%
- Gold open interest increased 11% vs only a 2.4% price increase
- Most current values are above their 50 DMAs showing current positive momentum
Figure: 14 Summary Table
Most precious metals investors should be thinking long term and not get caught up in the daily or even monthly movements in gold and silver. The fundamental picture could not be stronger as laid out in the Exploring Finance series. This analysis attempts to explain some of the more short-term movements in the market. The analysis last month concluded that the market was neutral after the November fall. This month is different. Positive momentum has turned many charts bullish.
In November gold blasted through tons of resistance a bit too easily without any breaks. This left fragile support in its wake. After the recent big move-up, consolidation around $1830 is a good sign. With the Fed meeting looming and a consolidation pattern getting tighter and tighter, the markets could be aligning for a big move to the upside. The surprise 6% move in the GDX on Wednesday could be a foreshadowing of what lies ahead. When the market moves, it could move very quickly!
Data Updated: Nightly around 11 PM Eastern
Last Updated: Jan 21, 2022
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