The price of gold and silver can be driven by several variables both technical and fundamental. Fundamental drivers include Fed meetings/speeches, their balance sheet, inflation data, jobs numbers, market risk appetite, etc. This analysis attempts to look at some of the more technical factors driving prices (e.g. Comex OI, Miners price action, technical price action). The CFCT Cots report can show investor positioning but is covered in another analysis.
Daily Moving Averages
One of the major technical indicators is the 50 Day Moving Average (DMA) vs the 200 DMA. As the chart below shows, the Gold 50 DMA had passed through the 200 DMA in June. This is referred to as a Golden Cross and can be a very bullish indicator. Unfortunately, it was quickly followed by the reverse known as a Death Cross, a very bearish indicator, which failed to confirm the bullish positioning.
These moving averages typically do not cross twice in such a short time frame. The last time this occurred was summer 2014 when gold was still 18 months away from bottoming. While anything is possible, the recent Death Cross is not a good sign. Gold will need to reverse quickly to bring bulls back into the market.
Figure: 1 Gold 50/200 DMA
Silver had the bullish trend negated last week as the 50 DMA moved down through the 200 DMA. This occurred in 2019 and 2020. Both bearish moves were quickly followed by strong rallies. Will it happen for a third time? It’s very possible the technical traders have been anticipating this move and the Death Cross finally created capitulation in the market. Regardless, the Death Cross is still a bearish indicator.
Figure: 2 Silver 50/200 DMA
Comex Open Interest
When traders and speculators get triggers to buy or sell based on their indicators, they take action in the futures market. This can magnify price moves (e.g. the Gold/Silver spike down in early August). Open Interest tends to be highly correlated with price. The two charts below show the open interest compared to the price in both gold and silver. Again, the overlap is not perfect, but major moves in one generally occur in tandem with the other.
In the latest price drop, shrinking Open Interest actually preceded the price move down. Open Interest peaked at 517k on July 26 before bottoming at 475k. Interestingly, in recent days, open interest is still moving up despite sideways action in the price. Because OI typically leads the price of gold, it’s possible this paints a modestly bullish picture.
Outlook: Cautiously Bullish
Figure: 3 Gold Price vs Open Interest
Focusing on the silver chart shows how the big price spike down last year in March followed by the big price spike up in July was highly correlated with open interest. Again, open interest cannot be looked at in isolation as current open interest is far below where it was leading up to 2020 yet the price is far higher.
In the most recent spike down, Silver Open Interest was recovering but turned on Aug 12 and moved back down. If open interest did indeed bottom at the end of July then the price should hold, but if the downward trend does not reverse, Silver is likely headed lower. For now, the trend looks lower, but that can change quickly.
Figure: 4 Silver Price vs Open Interest
To evaluate the true relationship of Open Interest and price action, the table below calculates the correlation between the two. The methodology takes the percentage change over a specific period and then calculates a correlation across multiple periods between the two variables.
Figure: 5 Price/OI Correlation
As shown, the correlation is not always high but at times it can be very high. One thing to note is the daily lead-lag correlation. This correlation is calculated by leading or lagging the data to see potential causation in the correlation. Currently, all correlations are relatively weak and Silver is uncharacteristically showing a negative correlation. This will most likely revert soon (OI falls, or price rises).
Zooming out to bigger periods shows a much stronger correlation. This calculates the correlation of weekly or monthly changes in price and open interest.
The gold mining companies often magnify the moves in Gold because they are leveraged to the price. Small price changes can have major impacts on profitability. Many times, the movement in stock precedes a move in the metal itself. Stocks are forward-looking and the selloff or price spike in the miners indicates the market anticipating the future movement in Gold. Below are two charts showing the historical and more recent trends.
Historically, the HUI is extremely undervalued. The HUI would have to increase 4x to reach the highs seen in the 1990s and 2000s. The sector has never really recovered from the gold price sell-off in 2008.
Figure: 6 HUI to Gold Historical Trend
Looking at the more recent trend shows how the miners typically lead the price movement in Gold (e.g. Mar 2020, July 2020, Mar 2021, May 2021). There are exceptions such as April 2020, but lately, the Gold stocks are front running the price moves in Gold.
This is concerning when looking at the most recent time period. The HUI has plummeted since Aug 2 compared to the Gold price. This is almost certainly driven by the “strong jobs report”, which convinced markets the Fed will taper imminently.
The next jobs report will probably resolve this divergence. Another strong report (as perceived by the market) will most likely result in gold selling off. A weaker than expected number may push the gold price upwards, but the HUI should have a much stronger response. Unfortunately, with the HUI leading prices lately, this is still a bearish sign until the jobs number confirms the move.
Figure: 7 HUI to Gold Current Trend
Love or hate the traders/speculators in the paper futures market, but it’s impossible to ignore the impact they have on price. The charts below show that the more active they are, the more prices tend to move up.
Trade volume has grown quiet in both metals. Some of this is a result of end-of-summer. Typically, big spikes down in volume (such as the most recent period) are followed by big jumps in volume which results in higher prices. The charts below point to more bottoming behavior because the volume is so low rather than a continuation of downward price action. While the charts are currently bearish, the data shows a reversal is imminent (traders returning after Labor Day?). For this reason, the outlook for both is bullish.
Gold and Silver Outlook: Bullish
Figure: 8 Gold Volume and Open Interest
Figure: 9 Silver Volume and Open Interest
USD and Treasuries
The price of gold and silver can move rapidly and dramatically in a very short period of time. Obviously, the supply and demand of physical metal is much slower to move, so this price action is driven by the futures market as mentioned above. Skeptics usually claim “price suppression” when the price goes down, but are more than happy to see the price go up.
Many times, when this type of action occurs, it can be driven by activity in the Treasury market or the US Dollar exchange rate. A big move up in Gold will often times occur simultaneously with a move down in US debt rates (a move up in Treasury prices) or a move down in the dollar. This relationship can also be seen over longer time periods as the chart below demonstrates. While gold magnifies the move, the pops and dips tend to move in the same direction.
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.
Figure: 10 Price Compare DXY, GLD, 10-year
The dollar (blue line reversed) is hitting multi-month highs. It looks ready to make a big move in either direction. Positive momentum could take it from 93 up to 100 very quickly where a breakdown could bring it back through 90.
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 the 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. Currently, the ratio has settled into a tight range just below 70 after blowing out last March.
While Silver had made up ground since last March, a major reversal occurred on July 2 bringing the ratio from 67 up to 76.5. Sudden moves like this typically reverse quickly. So Silver looks undervalued relative to Gold. Does this indicate a Silver price rise or a Gold price drop?
Outlook: Silver Bullish relative to Gold Bearish
Figure: 11 Historical 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 stack compared to the recent history. For example, Open Interest in silver is sitting below the 50 and 200 DMAs. Is it possible this indicates an oversold situation?
- Gold and Silver are both down significantly from the same time last year
- Gold and Silver are below the 50 and 200 DMA. They need to move up through these to signal bullish momentum.
- A big move looks to be coming after Labor Day with Jobs/Inflation data
Figure: 12 Summary Table
Obviously, no one can predict where the price of gold and silver are going in the future. Many articles in the Exploring Finance series look at the fundamental cases that theoretically should drive prices higher in the medium to long term. This analysis looked at some of the short-term drivers and showed how Open Interest is a major factor in the price of gold and silver regardless of what may be occurring elsewhere.
No doubt the metals are at an inflection point. The next round of jobs and inflation numbers could really push prices around, especially with asset managers returning after Labor Day.
Numbers and analysis will be updated monthly. A deeper look into the distribution of Open Interest (i.e. who is holding long and shorts) can be found in the analysis of the CFTC Commitment of Traders report (COTs report).
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11 PM Eastern
Last Updated: Aug 20, 2021
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