Analysis of gold and silver prices last month discussed the technical damage done and highlighted how support had become resistance. He concluded, “When everything is so bearish, it can mean capitulation. That said, beware trying to catch a falling knife. Due to the technical drivers in gold and silver, moves tend to expand beyond what seems possible as momentum carries the move forward… The paper market does move prices forward and speculative traders don’t see a Fed pivot anywhere, suggesting more time before a turn around.”
The short-term picture is still quite mixed despite the an incredible physical requirement on the Comex. The data below helps provide some context.
RESISTANCE AND SUPPORT
Since breaking below $1700, gold has been trapped around $1650. In early October, gold rose back above $1700 only to be pushed back below. Gold will need to break through this resistance and start setting higher highs to regain momentum.
Outlook: neutral to bearish
Silver had a strong rally above $21, but then fell back below $20. He can’t hold any momentum. This could be partly due to the CFTC raising margin requirements to cap price progression (see below).
Outlook: Bearish until $22 is removed
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
It is bearish that the 50 DMA ($1711) is well below the 200 DMA ($1819); however, the market rarely goes in one direction without stopping. The big move down looks overdone, which could lead to a short-term reversal. Either way, the momentum is down until the 50 DMA returns above the 200 DMA.
Figure: 2 gold 50/200 DMA
Silver has also been unable to maintain its momentum since 2020. The fall from the 50 DMA below the 200 DMA is the biggest since 2013. However, it was not until more than 2 years later that the market finally started to turn around at the time. .
Margin rate and open interest
Open interest is at multi-year lows not seen since April 2019, when the price was $400 lower. The market has been left for dead, suggesting that there is money on the sidelines to take advantage of any positive movement.
Margin rates also fell to their lowest levels since 2020, but the COT report suggests it brought more shorts than longs.
That said, the CFTC generally does not increase margin rates on shorts (this could induce a short squeeze). The CFTC uses margin rates to cap any price advance. There is no reason to raise rates to bring prices down, but if a price rally begins, the CFTC will have plenty of room to raise margin rates to contain any large increases.
Figure: 4 dollar margin rates on gold
Silver saw a sharp rise in price in early October, but the CFTC immediately raised margin rates, resulting in a quick turnaround. The CFTC has plenty of room to increase margin rates as it still sits near multi-year lows. Expect any price increases to be accompanied by margin rate increases, blunting, or even a reversal of momentum.
Figure: 5 Dollar margin rate on silver
Gold miners (Arca Gold Miners Index)
Gold miners have very consistently topped the price of gold back and forth for years. This week has been a good week for miners, capped by a significant Friday increase of 5%, driven by a WSJ report on potential Fed decision to be less hawkish. This is a good sign in the short term, as long as the Fed doesn’t come out next week and increase the hawkish rhetoric.
Outlook: cautiously optimistic
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.
Volume for both metals is showing a general lack of interest, even worse than early 2019. This likely shows limited decline but plenty of upside if interest returns to the market.
Cautiously bullish on gold and 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.
Figure: 10 DXY, GLD, 10-Year Price Comparison
The dollar continues to climb with soaring bond yields, which has put pressure on gold. To see the strength of the gold market, it is likely that the dollar will have to fall below the support which is around $105. This does not seem imminent given the current market environment.
Outlook: Bearish Until Dollar Reverses
Gold Silver Report
The gold-silver ratio has been quite volatile lately, rising during the selloffs but reversing when gold and silver bid. The instability will likely continue until the market perceives a pivot from the Fed, but in the medium to long term, silver is still undervalued relative to gold.
Outlook: Silver 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.
Both metals continue to slide and the measurements don’t look good.
- Open interest on gold is 15% below the 200 DMA with silver 5.7% below. This reflects the lack of interest.
- In gold, the trading volume of 50 DMA is 15% lower than that of 200 DMA
- Prices suffered, down 2.5% for gold and 4.4% for silver MoM
- Given the lack of interest, the price drops could have been worse
Figure: 12 Summary table
While many indicators are bearish, the absolute lack of interest shows that the market is beginning to bottom. The Fed may have finally reached its peak of hawkishness, as the WSJ linked above illustrates. Fed officials are starting to hint at concerns about their relentless hike in interest rates. In short, the bad news seems fully integrated while a pivot is definitely not integrated.
The Fed has probably already broken something. Moreover, the calculations work against them if they do not want to send the Treasury into a spiral of debt. The window is closing quickly for the Fed to bring inflation back to target before a pivot (or break) occurs.
When all the bad news is factored in, that leaves a lot more upside potential than downside risk. Add in the insatiable demand for physical metal seen at Comex and it looks like this market will turn around sooner or later. Still, the support has become resilient, so the market has work ahead of it. Medium and long term investors should be very confident to buy at current prices, even if price action remains volatile in the short term.
The data source: Futures and Options Trading for Risk Management – CME Group and fmpcloud.io for DXY index data
Data updated: Every night around 11:00 p.m. EST
Last update: October 20, 2022
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.