Technical Analysis: Resting Between Fragile Support and Weak Resistance
Gold and silver have been on a wild ride for the past several weeks, the last technical analysis showed how gold had broken through the lengthy consolidation pattern between $1750-$1800, with the Ukraine crisis pushing the metal through $1900.
The past few weeks have seen even more volatility with gold hitting its all-time high in the $2070 range before seeing a major pullback to a $1921 close. The metal now enters a consolidation pattern as it tries to carve out support and resistance. This consolidation is healthy if gold wants to make another run in the near future.
Resistance and Support
Gold blew through all resistance levels on its way up, but similar to the November spike, no support was built to protect it on the way down. Currently, the old all-time high from 2011 around $1915 is serving as minor support. This week showed that slightly firmer support is $1900 with minor resistance at $1950. The firmer bands are $1850-$1880 on the downside and $2000-$2050 on the upside.
Gold is still in a bullish pattern after breaking out of the 18-month consolidation pattern, but it will need another catalyst to make a new attempt at all-time highs. Perhaps the action in the Comex at the end of March could be a spark. The banks are clearly bracing for a possible event.
Outlook: Short-term neutral but medium-term bullish
Silver has been in lockstep with gold as the chart below shows. It reached $26.90 on March 8, but has also experienced quite a pullback and is now resting just above $25 support at $25.16. Similar to $1900 in gold, $25 worked as fragile support this week. It will most likely be tested again early next week. $26 is serving as the first major level of resistance for silver. Without a catalyst to move up, it looks like it wants to test $24.50 again in the near term before resuming the newly formed bull trend.
Outlook: Slightly Bearish in the immediate term
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
The 50 DMA has pulled away from 200 quite strongly and the current price sits comfortably above both averages. As shown in the chart, the 50 DMA likes to test the 200 DMA frequently throughout a bull trend. This suggests near-term bearishness within a bullish trend.
Outlook: Short term bearish medium-term bullish
Figure: 2 Gold 50/200 DMA
Silver 50 DMA has been trapped under the 200 DMA for the longest period in 5 years. It’s rapidly approaching a breakout but is not there yet. Apart from a few brief periods where silver really burst upwards, the 50 DMA has been consistently below the 200 DMA for most of the last 15 years.
Unfortunately, the current pattern most resembles that of 2011. The one positive side is that the consolidation has been longer and less volatile than in 2011. While that lends a bullish tilt, this chart is still bearish until silver can break through and hold above both averages. If silver can hold above $24.50 then the 50 DMA will break through the 200 and the chart will turn bullish. Until then, bearish.
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 is currently sitting at its highest point since March of 2020. This means most of the speculative money has been pulled into gold at the moment suggesting there is less available supply to continue fueling a move higher. There has been some profit-taking since the peak, but clearly the market is a bit saturated. This speculative money will leave in a hurry if the rally shows further weakness.
Figure: 4 Gold Price vs Open Interest
Silver does not appear as overbought as gold does. While it generally follows the direction of the yellow metal, there is clearly more room for it to run with more money on the sidelines relative to recent history.
Figure: 5 Silver Price vs Open Interest
Margin rates were covered in great detail in a previous article. TL; DR rates are well below where they were when both gold and silver were at their 2020 highs. This gives the CME ample room to raise margin rates into any price rally. This will keep any rally muted and potentially even reverse it. As an example, gold margin rates were raised on March 9 which coincided with an $80 drop in the metal.
The price movement in mining companies tends to precede a move in the metal itself. For anyone watching closely, this has been especially true over the last few weeks. When gold burst through $2000, the GDX (an ETF that closely mirrors the HUI) cut through major resistance at $40 but then immediately went backwards. 24 hours later, gold followed.
Even this week, the miners were leading gold lower (pre-Fed), bottoming right after the Fed meeting (Wed), rose on Thursday, but then failed to show strength to close out the week. GDX was ahead of gold by a few hours on each day.
The chart below shows the gold price against the miners on a daily level. The positive move in the blue line on the far right shows that the miners are leading the metal in the short term.
Figure: 6 HUI to Gold Current Trend
Zooming out shows a very different picture, where the miners have fallen way behind the metal. There could be many reasons for this:
- Value stocks have been out of favor for quite some time
- The market is skeptical of the current gold rally
- Miners do not have nearly the leverage of current tech companies
The price discount of the miners is most likely a combination of all three, but the years ahead could prove each assumption wrong. At the very least, the first two.
In the short term, the current activity in the miners suggests a consolidation period ahead. The GDX is well below major resistance at $40 but above previous resistance at $35. It looks to be preparing for a consolidation period between those two values.
Figure: 7 HUI to Gold Historical 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.
Trade volume in gold has been climbing recently but was surprisingly muted given the FOMC meeting last week. Volume fell by almost 50% week-over-week but remains quite high compared to the December lows. If volume can stay elevated in the coming weeks it will show the market has continued interest in the gold market and could support prices.
Silver has seen volume fall back down in the latest week after quite a surge. The lack of interest in the latest week was also surprising. If the excitement is already gone in the silver market, then prices could drift lower before the next catalyst restores interest.
Neutral in gold but bearish in silver
Figure: 8 Gold Volume and Open Interest
Figure: 9 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.
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: 10 Price Compare DXY, GLD, 10-year
The Russian invasion of Ukraine saw a flight to safety across the board into bonds, gold, and the dollar. Typically, you don’t see the dollar and gold rallying together, but the flight to safe havens created this divergence.
Bonds were the first to reverse the move as the 10-year hit new highs this week in the latest move. Gold has reversed about 50% of the flight to safety move, while the dollar has only reversed about a third of the move. Dollar strength is a headwind for gold, so if the war headlines continue to recede the dollar strength should fade further. This will be supportive of gold prices. Higher rates could also be a minor headwind except that real rates remain firmly negative.
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.
Similar to the miners, silver has been lagging gold over the last decade. This means that silver still has catching up to do in order to revisit historical averages.
Outlook: Silver Bullish relative to gold
Figure: 11 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 stand compared to recent history.
The charts above tilt bearish in the near term but still support a long-term bullish structure.
- Gold is up both MoM (4.7%) and YoY (12.2%) supporting the long-term bullish picture
- The HUI Gold ratio has improved quite a bit over the last month showing that the miners are confirming the breakout move (up 9%) even if consolidation is needed
- Gold/Silver Ratio is down almost 5% over the last month showing that silver also led gold in the latest month
Figure: 12 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. That being said, this analysis attempts to explain some of the more short-term movements in the market that may have frustrated long-term investors.
The technical backdrop suggests caution is warranted in the very near-term against the backdrop of a new up leg in the bull market. The breakout has been confirmed, but consolidation is needed. This aligns with the current fundamental backdrop as well. Fading war headlines, a fed perceived as hawkish by the market, and the CME ready to raise margin rates will all be headwinds for gold. This doesn’t change the largely supportive backdrop of a weakening economy, raging inflation, and potentially record physical demand at the Comex. The healthiest thing for the market would be to rest and consolidate in the current range of $1900-$1950. This will strengthen support from which gold can attack new all-time highs later this year.
Data Updated: Nightly around 11 PM Eastern
Last Updated: Mar 18, 2022
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