The price analysis two months ago concluded that a neutral market had been found between $1800 and $1850 and was waiting to see a break of resistance or support. It leaned bullish with indicators showing the down move had run its course but it also highlighted the risk that a drop below $1800 and $1750 brings $1680 into play.

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 Last month concluded that even though gold was still trapped between $1800 and $1850 it had built up solid support. Unfortunately, gold fell through the trap door at $1800 and tested $1680 this week. Has a bottom been found? Too soon to tell, but a look at the indicators could give some clues.

Resistance and Support

Gold

Gold has fallen through all levels of recent support and even tested strong support at $1680 this past week. It managed to close above $1700 each day though and more signs of economic weakness have produced a bounce to $1725. $1750 could prove strong overhead resistance after such a long consolidation above that level in 2021, so gold seems a bit trapped between $1680-$1750 and really needs to take out $1780 for a bullish signal. For now, momentum is down.

Outlook: Neutral to Bearish

Silver

Silver also fell through a trap door at $20 and closed as low as $18.22. Last month did highlight concern in silver and identified the potential for weakness. That being said, an 18-handle looked improbable. Similar to gold though, it fell through several levels of strong support which turns all of those into resistance. $20 is the next major hurdle for silver to regain momentum.

Outlook: Neutral to Bearish

Figure: 1 Gold and Silver Price Action

Daily Moving Averages (DMA)

Gold

The 50 DMA ($1806) crashed through the 200DMA ($1842), to create a death cross. This is a bearish indicator, especially with gold sitting comfortably below both levels at $1727.

Outlook: Bearish

Figure: 2 Gold 50/200 DMA

Silver

Silver formed a death cross back on June 1 and has 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 turn around.

Outlook: Bearish

Margin Rates and Open Interest

Gold

Margin rates fell on July 11 from $7500 to $6500. This typically increases spec positioning in the market which will push prices up. This means lower margin rates are a bearish indicator as the CFTC can increase rates to blunt any price advance. However, in this case, the fall in margin rates has increased spec positioning on the short side. This can be seen in the CFTC COTs report with managed money going 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. Managed money longs have been mostly flat since May. Banks typically take the other side of the Managed Money trade and are much better capitalized. This means any increase in margin will force liquidate the short side putting upward pressure on prices.

Outlook: Bullish

Figure: 4 Gold Margin Dollar Rate

Silver

The same situation is playing out in silver. Spec shorts have piled in with longs remaining low and flat. An increase in margin could force liquidate shorts.

Outlook: Bullish

Figure: 5 Silver Margin Dollar Rate

Gold Miners (Arca Gold Miners Index)

The gold miners have been very consistently leading the price of gold in both directions. The big fall in miners preceded the latest move down. This created a conclusion last month of “Either Bullish Miners or Bearish Gold”. Unfortunately, the metal is still following the miners and gold fell through the floor. In the latest week, the miners have had trouble gaining traction, even while gold rebounded. The miners followed the stock market lower on Friday even while gold had an up day. Until the miners can gain traction and start powering higher, momentum in gold is clearly down.

Outlook: Bearish

Figure: 6 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: 7 Arca Gold Miners to Gold Historical Trend

Trade Volume

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 is back at the lower range but not at the bottom. This is mostly because the shorts have been active in the market. Silver is closer to the bottom of the volume trading range.

Bearish/Neutral Gold and Bullish Silver

Figure: 8 Gold Volume and Open Interest

Figure: 9 Silver Volume and Open Interest

Other drivers

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 dollar has been on an absolute tear for months now. The DXY burst through resistance at $105 and reached as high as $109. Both the dollar and treasuries reversed later in the week though and gold followed through with a modest rally. Is this a correction or a reversal? Watch the $105 and $109 levels in the DXY for clues to the next big move.

Outlook: Neutral

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.

Silver is definitely outside the band which means either gold will fall or silver will need to catch up.

Outlook: Silver VERY 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 are definitely bearish until gold and silver can regain some momentum. That being said, when markets capitulate, it typically looks like the action from the past month. For example:

• • Gold is down 6% and Silver 13.5% in a single month!
    • • These are huge moves in very short periods which look overextended to the downside
  • The current gold miners ratio is almost 10% below the 50 DMA
  • The current gold/silver ratio is 15% higher than the 50 DMA
    • • Showing extreme levels to the upside and signaling a possible reversal where silver outperforms gold

Figure: 12 Summary Table

Wrapping up

Is this capitulation? The FOMC meets this week with an 80% chance to raise rates 75bps and 20% chance of 100bps. As more data comes in, the Fed is finding it harder to deny the US is already in recession. This may become impossible when GDP numbers are released this week, which should unofficially put the US Economy in recession (an official recession is determined by 8 economists). Regardless, it’s hard to think the Fed has not reached peak hawkishness. The market knows a Fed pivot is coming but wants a bit more evidence as to when.

Furthermore, demand in the physical market is extremely strong. Gold could set a record in mid-month net new contracts for delivery and metal has been leaving Comex vaults at a rapid pace. This is happening while the spot market sits in backwardation and speculative shorts are ripe for a squeeze.

On the flip side, almost all the indicators above are bearish. Momentum is clearly down. While this typically happens near a market bottom, traders wait for confirmation of a reversal to avoid catching falling knives. Some of the indicators above need to turn positive in order for long traders to get the “all-clear”. Perhaps the FOMC meeting with GDP will be the spark needed to reignite gold and silver.

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