While the price analysis last month was very neutral, the data this month points to a bit more positive momentum in the gold and silver markets.
Last month I highlighted that gold was trapped between long-term support and resistance.
Regaining $1700 is a positive turn, especially with the explosiveness of the move. That said, $1800 has proven to be a much harder hurdle to hold above. At $1750, it sits right in the middle of what was once very solid support and solid resistance. A move through either could create a snowball effect.
Let’s take a closer look at the data.
Resistance and Support
Gold has had a long-term relationship with $1800. It gets trapped below, hits the resistance several times, and finally breaks through. Inevitably, something will trigger a sell-off and gold will get pushed back below $1800 and the process starts over. Considering where the Fed is in the tightening cycle, gold has fewer and fewer reasons to sell off. The next strong move above $1800 may be the one that finally launches it over $2000.
Futures finished the week above $1800 at $1804 while the spot market is just below sitting at $1798.50. The coiled spring is getting tighter.
Silver finally took out $22 and has been moving up rather quickly. It is leading gold high which is a good sign for both metals.
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
While gold has not yet technically formed a golden cross, it seems to be heading that way. The price closed out the week above both the 200 DMA ($1793) and the 50 DMA ($1738). The 50 DMA is moving up quickly. While it is too early to wave the all-clear sign, we are getting closer. Expect a bit more choppiness until the golden cross officially forms.
Outlook: short-term choppy into medium-term bullishness
Figure: 2 Gold 50/200 DMA
Silver formed a golden cross just yesterday. The current price of $23.92 was high enough to drag the 50 DMA ($21.38) above the 200 DMA ($21.30). Silver has had several false break-outs over the past few years and follow-through next week might be limited due to the holiday. That said, given the intense physical demand in the metal during 2022, silver could blast into 2023 to start the year.
It’s still a bit too early to get very bullish, but when silver takes off it could be very explosive.
Outlook: Prepare to be VERY Bullish
Margin Rates and Open Interest
Open interest is near multi-year lows, yet the price has held up very well. The last pop-up in open interest was likely shorts rather than longs. The shorts have closed but this still leaves lots of dry powder from the longs on the sidelines to jump on any bullish momentum.
The one thing that will hold back a truly explosive move in gold will be the CFTC raising margin rates to contain the price. That could be short-term in nature though. If physical demand maintains, the CFTC could increase margin rates to 100% and it won’t slow down the freight train.
Outlook: Cautiously Bullish
Figure: 6 Gold Margin Dollar Rate
Silver is in a very similar posture to gold with open interest at the lowest level in years with margin rates also on the lower end of the range.
Outlook: Cautiously Bullish
Figure: 7 Silver Margin Dollar Rate
Gold Miners (Arca Gold Miners Index)
The gold miners have been consistently leading the price of gold in both directions for years. The current move in the miners is stronger than it was back in August when gold even got above $1800. While the sector was very oversold, it’s a positive development that the ratio has rebounded so strongly. This means stock traders are expecting the price advance to continue.
Similar to the gold barrier at $1800, GDX is facing a similar barrier at $30. Despite all the Fed headwinds, both the metals and miners are holding up well. If GDX breaks through $30 it could be a big move higher. Until then…
Figure: 8 Arca Gold Miners to Gold Current Trend
Looking over a long time horizon shows how badly the miners have underperformed gold over the last decade. This shows traders have never confidently bought into any gold momentum, anticipating price advances will be short-lived. When this trend reverses, gold could start flying higher being led by a surging mining sector.
Figure: 9 Arca Gold Miners 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.
Volume in both metals is only slightly above recent lows. Next week will likely see even less volume. If volume picks up in January it could help drive prices higher. It’s unlikely volume will dip lower, especially as a recession becomes more evident.
More upside than downside
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.
Figure: 12 Price Compare DXY, GLD, 10-year
The dollar has finally relented after it ripped higher through September of this year. The DXY exceeded $114 but has since fallen back below $105. The dollar is now trying to stabilize after a big fall from its recent highs.
Bond yields face their own challenge with long-term rates well below short-term rates. This has produced the most inverted yield curve in decades.
The market is starting to come to terms with a dire recession in 2023 which will drive rates lower. The Fed has committed to keeping rates higher through 2023, but it’s unlikely the market will allow them to do so. This is why the dollar is falling which will likely drive gold higher.
Outlook: Cautiously Bullish – Next target on Dollar is $100
Gold Silver Ratio
The gold silver ratio has been steadily falling since breaching 96 in September. It now sits at 75 which is becoming more reasonable but still has plenty of room to go lower.
Outlook: Silver still 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 stand compared to recent history.
- Silver is up 11.3% in the last month, but gold is only up 2.3% – it has catching up to do
- Open interest has come down with volume falling even lower
- Open interest is below the 50 and 200 DMA in both metals
- Volume was half the 50 DMA yesterday as the holiday weekend got started early
Figure: 14 Summary Table
As we close out the week before Christmas, gold is once again flirting with $1800, unable to maintain any price breakthroughs despite multiple attempts. It is also unwilling to get pushed too far below the barrier. The same thing played out in 2021 until gold finally broke through (only to get pushed back down).
The difference this time: First, silver is leading the charge up instead of clearing the way down. Second, the metal is also on the backend of peak hawkishness of the Fed. Back in 2021, the Fed was yet to get aggressive with hikes, now the Fed has played its bluff perfectly and has everyone convinced Powell = Volker. 2023 will likely force the Fed to show its cards.
They have done enough in 2022 to say “we have proven we can fight inflation when we need to, but this emergency needs us to loosen policy”. The question becomes whether the market believes them and finally realizes the Fed is the reason they had to raise rates and also the reason they had to lower rates to combat the emergency they created.
Shorts are playing with fire as many trends are pointing to a solid advance in prices during 2023.
Data Updated: Nightly around 11 PM Eastern
Last Updated: Dec 23, 2022
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