Last month’s price analysis, Warranted Short-Term Caution, highlighted the potential risk in gold and silver even after a tough July and early August. He concluded that the path is now much less clear. Gold could again be limited between $1,750 and $1,800. Or, a hawkish Fed at the top of Jackson Hole could potentially break through $1,750 and open the door to new lows. Gold diggers are definitely anticipating this.
The hawkish Fed showed up in Jackson Hole and again on Wednesday, sending the metals tumbling. After a brief hedging rally over the weekend, gold found new lows on Friday, led by the miners. The market is now oversold, which could lead to a short-term bounce. However, any rally is unlikely to gain momentum until a Fed pivot is clearly in sight (or the physical market collapses). Fortunately for gold and silver bulls, the pivot will appear sooner than anyone currently expects.
The Fed spoke tough and backed him up. However, they’ve probably already broken something and the data hasn’t shown it yet. They are changing so rapidly that by the time the cracks appear in the data, it will be too late. The Fed will be dealing with an economy on the brink. So what?
For now, the Fed has room to keep moving forward. The data looks fine, the Fed said it would accept a bumpy landing and the market is selling but not crashing. Thus, the metals continue to slide. So what does the data to come show?
Resistance and support
Gold has fallen below $1,700 and is barely hanging on at $1,650. The shorts smell of blood and cause the longs to trigger stoppages. If that happens, the market could see the metals trade into the $1,500s. $1,750 is the new hard cap gold that needs to break through. Until then, the pressure is down.
Despite a difficult Friday, silver held up much better than gold. That being said, silver had some issues with $20, but the real resistance lies at $22.
Outlook: Bearish until $22 is removed
Daily Moving Averages (DMA)
It is bearish that the 50 DMA ($1,743) is well below the 200 DMA ($1,831); however, the market rarely goes in one direction without stopping. Expect a short-term rebound. The bounce cannot be trusted until the current price ($1,655) at least breaks above the 50 DMA and more likely the 50 DMA must break the 200 DMA to confirm a new uptrend.
Silver is slightly different with the current price ($18.91) just below the 50 DMA ($19.25). He had jumped over him a few times this week but couldn’t hold on. The $22.10 200 DMA is even a little further away.
Outlook: looking for a change in trend
Margin rate and open interest
Open interest is at a multi-year low and has likely only increased slightly in recent days due to the arrival of shorts in the market. This means there is enough dry powder on the fingerboard to follow a long stroke when it comes.
That being said, gold margin rates are at $5,700 (3.45%), which is the lowest since March 2020. This has actually led to an increase in short positions as speculators seek a leverage effect on their prospects.
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. So while there is money on the sidelines to drive a long move, it will be held back by the CFTC.
The situation with silver is very similar to that with gold. The COTs report shows that silver positioning is still sharp in Managed Money. Margin rates and open interest are both very low.
Gold miners (Arca Gold Miners Index)
Gold miners have very consistently topped the price of gold in both directions. The start of this week showed a potentially positive sign as miners held up to the pressure on the metal quite well. Unfortunately, the dam broke and the miners reached new lows for the move. Against gold, miners are now at their lowest level since February 2016. The sector is definitely trying to bottom out, but it’s hard to catch a falling knife. Wait for a clear trend change.
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.
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. This was invalidated over the past month as volume was pulled by shorts.
Either way, the volume of the two metals shows a general lack of interest. Another indicator of a potential bottom. The next volume surge might create a short squeeze when it happens, but it doesn’t seem imminent.
Neutral gold and neutral silver
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.
The dollar continues to climb, hitting new multi-decade highs this week, breaking above $113. Rates are also exploding higher, hurting gold’s appeal. Again, this is bearish momentum, but it shows a market where everyone is on one side of the trade.
Outlook: Bearish Until Dollar Reverses
Gold Silver Report
One silver lining in the data is the recent fall in the gold-silver ratio. Besides the Covid-induced surge in 2020, the ratio had reached its highest level in years. Silver finally saw strength against gold, despite a lousy Friday. If silver can sustain the momentum, it could turn the sector around.
Outlook: cautiously optimistic
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.
- The HUI Gold ratio fell 6.5% this month and is down 20% from a year ago
- Silver open interest fell another 6.5%, but the price held up well, falling just 0.3%
- The price of gold fell by 6% leading to the improvement in the gold-silver ratio by 5.7%
When everything is so bearish, it can be a sign of capitulation. That said, beware of trying to catch a falling knife. Due to the technical drivers of gold and silver, moves tend to expand beyond what seems possible as momentum drives the move forward. The market is due for a bounce, but will it be a dead account bounce or something with legs?
The paper market is driving prices higher and specialist traders see nowhere a pivot from the Fed, suggesting more time before a reversal. However, anyone watching the physical market should realize that paper shorts are playing with fire. Gold and silver are flowing in from the Comex Registered at an unprecedented rate. The physical market may see the Fed pivot. At this rate, the paper market might not even need to see the pivot to induce the mother of all short cuts that will send both gold and silver to new all-time highs.
While there may be choppy or bearish action in the weeks and months ahead, the fundamental picture will prevail. Long-term physical investors should not time the market but should capitalize on prices that may never be seen again.
Data source: Futures & 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: September 23, 2022
Interactive Gold and Silver charts and graphs are available on the Exploring Finance Dashboard: Gold and Silver Analysis
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.