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.
As of this week, the 50 DMA is still trending below the 200 DMA. That being said, it is staying close. It is positioned to reverse quickly with only little support needed.
Outlook: Bearish but could reverse quickly
Figure: 1 Gold 50/200 DMA
Silver had the bullish trend negated last month 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? Maybe, but the move through has been rapid and steep. It’s possible silver selling is reaching exhaustion, but for now, the chart looks bearish.
Figure: 2 Silver 50/200 DMA
Comex Open Interest
The two charts below show the open interest compared to the price in both gold and silver. The overlap is not perfect, but major moves in one generally occur in tandem with the other as speculators push and pull the price around with paper contracts.
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. Open interest is currently sitting at 494k, above the 475k low in late July but the gold price is actually lower. Either open interest should fall further or the price could recover. Considering how low open interest already is, it seems like a price increase may be more likely.
Outlook: Cautiously Bullish
Figure: 3 Gold Price vs Open Interest
Silver open interest has collapsed to the lowest level since the massive spike down last March. This September, it bottomed at 139k contracts before rising back to 145k currently. The chart below shows a 12-year view. It shows the extent to which open interest has come down in the most recent fall. Excluding the brief sell-off last year, this is the lowest open interest since 2014.
Although this gives an initial bearish impression. This chart looks more like exhaustion as sentiment is hitting multi-year lows.
Outlook: Cautiously bullish
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, there is a negative correlation in the Lag variable which is very strange and unexpected.
Zooming out to bigger periods shows a much stronger correlation. This calculates the correlation of weekly or monthly changes in price and open interest. Over 1-12 months the correlation has reached .8 which is very high.
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 sell-off 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, Aug 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 in August before the recent gold sell-off. The price has continued to move lower meaning that traders are anticipating a sell-off in gold on the horizon. The ratio is the lowest since April of 2020 during a massive spike down.
The recent stance by the Fed has been perceived as slightly more hawkish creating even more selling in the gold miners. Gold has still held up well, but eventually, it will cave if the miners do not turn around soon. The equity traders are certainly expecting gold to sell off big time in the near future.
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.
At first, it was thought that volume may start to increase after Labor Day marked the end of summer. Unfortunately, volume has continued to stay low. It’s hard to imagine volume can go lower, but there does not seem any major catalyst (maybe Chinese real estate?) to bring back trade volume.
Gold and Silver Outlook: Neutral
Figure: 8 Gold Volume and Open Interest
Figure: 9 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. 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) has hit resistance at 93.50 having a triple top over 6 months. Either the dollar is about to break out or it cannot break through a very solid ceiling after a third try which could push the dollar back down. The chart is looking slightly more bearish on the dollar. Gold has already seen the big sell-off, potentially in anticipation of a dollar rally. With the dollar unable to gain momentum, gold traders may have to reverse course if the dollar starts to drift lower.
Outlook: Slightly bullish
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.
While Silver had made up ground since last March, a major reversal occurred on July 2 bringing the ratio from 67 up to 79.5. 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? Hard to know for sure, but more likely silver is very oversold and looking for a reversal.
Outlook: Silver Bullish relative to Gold Bearish
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 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.
- Gold would only need to reach 1810 to get through resistance.
- Silver has a much harder path to climb, needing to get above 25.8 to get over the 200 DMA (15% move)
- A big move was coming and it appears the move was down. That being said, it’s possible this was a head fake to shake out the last weak hands in the futures market
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.
With three more releases of jobs and inflation combined with 2 Fed meetings, it’s hard to think volatility will not increase in the weeks ahead.
Data Source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Nightly around 11 PM Eastern
Last Updated: Sep 23, 2021
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