Price analysis two months ago concluded that a neutral market was found between $1800 and $1850 and was waiting to see a break of resistance or support. He leaned higher with indicators showing the decline had run its course, but he also pointed to the risk that a drop below $1800 and $1750 puts $1680 into play. Last month concluded that although gold was still trapped between $1800 and $1850, it had built strong support. Unfortunately, gold fell through the trap at $1800 and tested $1680 this week. Has a fund been found? Too early to tell, but a look at the indicators might give some clues.
Resistance and support
Gold has fallen to all levels of recent support and even tested strong support at $1680 last week. It managed to close above $1700 every day and further signs of economic weakness produced a rebound to $1725. $1750 could prove strong aerial resistance after such a long consolidation above this level in 2021, so gold looks a bit trapped between $1680 and $1750 and really needs to pull back $1780 for a bullish signal . For now, the momentum is down.
Outlook: neutral to bearish
Silver also fell through a trap at $20 and closed at $18.22. The past month has brought silver concerns to light and identified the potential for weakness. That being said, a handful of 18 seemed unlikely. Similar to gold however, it has fallen through several strong support levels which all turn into resistance. $20 is the next big hurdle for silver to regain momentum.
Outlook: neutral to bearish
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
The 50 DMA ($1806) crashed into the 200DMA ($1842), to create a death cross. This is a bearish indicator, especially with gold sitting comfortably below both levels at $1727.
Figure: 2 gold 50/200 DMA
Silver formed a death cross on June 1 and responded in kind with very bearish price action. The 200 DMA at $23.07 is well above the 50 DMA at $20.78. The price is well below both averages at $18.62. Momentum is down until these numbers pick up.
Margin rate and open interest
Margin rates fell on July 11 from $7,500 to $6,500. This generally increases the positioning of the specifications in the market, which will drive up the prices. This means that lower margin rates are a bearish indicator, as the CFTC may raise rates to dampen any price advance. However, in this case, the decline in margin rates has increased spec positioning on the short side. This can be seen in the CFTC COTs report with money managed net short in the futures market for the first time since April 2019.
The recent increase in open interest has been driven by shorts, not longs. Long managed silver positions have been flat since May. Banks generally take the other side of the managed silver business and are much better capitalized. This means that any increase in margin will force the selling side to be liquidated, which will put upward pressure on prices.
Figure: 4 dollar margin rates on gold
The same situation is played out in money. The Spec shorts stacked up, with the longs staying low and flat. An increase in margin could force the liquidation of the shorts.
Figure: 5 Dollar margin rate on silver
Gold miners (Arca Gold Miners Index)
Gold miners have very consistently topped the price of gold in both directions. The sharp decline in miners preceded the latest decline. This created a conclusion last month of “either bullish miners or bearish gold”. Unfortunately, the metal still follows the miners and the gold fell through the ground. Over the past week, miners have struggled to gain ground, even as gold rallied. Miners followed the stock market decline on Friday even as gold had a bullish day. Until the miners can gain traction and start ramping up their power, gold’s momentum is clearly waning.
Figure: 6 Arca gold miners at the current gold trend
Looking at a long-term horizon shows how much miners have underperformed gold over the past decade. This shows that traders have never confidently bought any momentum in gold, anticipating that price increases will be short-lived. When this trend reverses, gold could start to fly higher, led by a booming mining sector.
Figure: 7 Historical trend of Arca gold miners to gold
Love or hate traders/speculators in the paper futures market, but their impact on prices is impossible to ignore. The charts below show that more activity tends to drive prices higher.
Gold trading volume is back in the low range but not the lows. This is mainly because the shorts have been active in the market. Silver is closer to the bottom of the trading volume range.
Bearish/Neutral Gold and Bullish Silver
Figure: 8 Gold volume and open interest
Figure: 9 Silver volume and open interest
USD and treasury bills
Price action can be driven by activity in the Treasury market or the US dollar exchange rate. A sharp rise in gold will often occur simultaneously with a drop in US debt rates (a rise in Treasury prices) or a decline in the dollar.
Please note: IEF is the iShares 7-10 year ETF (a move up represents falling rates) and the dollar return is reversed in this chart to show a positive correlation. They are also plotted on the right y-axis to better show price movement.
Figure: 10 DXY, GLD, 10-Year Price Comparison
The dollar has been on an absolute tear for months now. The DXY broke through the resistance at $105 and reached $109. The dollar and Treasuries reversed later in the week and gold followed with a modest rally. Is this a correction or a reversal? Watch the $105 and $109 levels in the DXY for clues on the next big move.
Gold Silver Report
Gold and silver are very strongly correlated, but do not move in perfect harmony. The gold/silver ratio is used by traders to determine the relative value between the two metals. Historically, the ratio has averaged between 40 and 60, so outside of this ban may indicate an upcoming mean reversion.
Silver is definitely outside the band, which means gold will fall or silver will have to catch up.
Outlook: Silver VERY bullish versus gold
Figure: 11 Gold Silver Ratio
Bring it all together
The table below shows an overview of the trends that exist in the charts above. It compares the current values to those of a month, a year and three years ago. It also looks at the 50 and 200 day moving averages. While DMAs are usually only calculated for prices, the DMA on other variables can show where current values stand relative to recent history.
The charts above are definitely bearish until gold and silver regain momentum. That being said, when the markets capitulate, it usually looks like last month’s action. For instance:
- Gold is down 6% and silver 13.5% in a single month!
- These are huge movements in very short periods that seem too extended on the downside
- The current ratio of gold miners is almost 10% below the 50 DMA
- The current gold/silver ratio is 15% above the 50 DMA
- Showing extreme levels to the upside and signaling a possible reversal where silver outperforms gold
- Gold is down 6% and silver 13.5% in a single month!
Figure: 12 Summary table
Is it a surrender? The FOMC meets this week with an 80% chance of raising rates by 75 basis points and a 20% chance by 100 basis points. As new data comes in, the Fed finds it hard to deny that the US is already in a recession. This could become impossible when the GDP figures are released this week, which should unofficially put the US economy into recession (an official recession is determined by 8 economists). Either way, it’s hard to think the Fed hasn’t reached its peak of warmongering. The market knows a Fed pivot is coming, but wants a little more evidence on when.
Moreover, the demand in the physical market is extremely strong. Gold could set a record for net new delivery contracts mid-month and the metal has been leaving Comex vaults at a rapid pace. This is happening as the spot market is in decline and speculative shorts are ripe for compression.
On the other hand, almost all of the above indicators are bearish. The momentum is clearly down. Although this usually happens near a market low, traders wait for confirmation of a reversal to avoid catching falling knives. Some of the indicators above need to turn positive for long traders to get the “green light”. Perhaps the FOMC meeting with GDP will be the spark needed to rekindle gold and silver.
Data source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Update: Every night around 11:00 p.m. EST
Last update: July 22, 2022
Interactive Gold and Silver charts and graphs are available on the Exploring Finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/
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