Market Analysis

Silver remains a slow moving, frustrating long position for metals bulls who have remained steadfast over the past two years while watching base metals, energy, ags, and virtually all other commodities explode in price over the past 18 months. Since the price peak in August of 2020, Silver is down almost 20% while the DBC commodity tracking ETF is up 170%. Let’s take a look at the tape.

Gold

It has been awhile since I posted an update on metals, largely because metals have been stuck in quiet consolidation mode until the past week or so. We have been watching falling trend channel resistance on gold for the past six months, and after the double bottom in March around the 61.8% Fibonacci retracement, gold has steadily climbed, recapturing the 200 day moving average for the first time since February 2^nd and breaking out above falling resistance of the multi-month bull flag that commenced with the August ’20 peak. Price action looks exceedingly constructive here, with RSI now in overbought territory for the first time in nine months. Bulls want to see price hold the 200 DMA, or at least stay above 1840. There is blue sky to 1965 if it does.

Silver

Gold has been the laggard. Higher beta silver, as well as mining stocks, have led the way. Silver broke the 200 DMA in early April, and has once again hurdled the troublesome 25-27 area. Bulls need silver to hold 28.50 for a retest of 30, which it struck twice in the last nine months. A break of 30 should precipitate a swift move to the 161.8 Fibonacci extension at 35, which coincides with the October 2012 peak.

Gold Miners

GDX, the Gold Miner ETF, broker falling resistance on the 4^th test back on April 15^th, successfully retested, and has pushed its way back to the 61.8 Fibonacci retracement from the August high. Constructively, price has never fallen into oversold territory from the entire move following the March 2020 low – even during this long consolidation period. We are likely to see some digestion

Gold

For the past month gold has been trading in a range between 1720 and 1780, struggling to make the breakout leap it seemed to promise the first week of the year. Gnawing at bulls is the fact that every other commodity, like copper, gold, zinc, and others, have exploded higher while gold seems stuck on the launch pad.

Gold

Metals bulls have been frustrated with repeated attempts to break out of a multi-month bull flag/falling channel. At the turn of the new year, with the presidential election all but behind the country, and with calls for more money-printing and ongoing stimulus, it seemed a given that – like the base metals and energy - gold would break out and follow the inflation narrative to higher prices. And, for three days, that is just what happened, as gold pushed from a 2020 close of $1895 to $1960 in the first three days of the new year, only to sell off hard and fall back below falling trend line support. This was gold’s second pass at $1960, which was the 6.18% Fibonacci retracement from the August high to the November low. As the saying goes, from failed moves come fast moves, and the failed move precipitated a $160 sell-off in a week and a half ($140 of which occurred in the 3 days following the peak). It was a major head fake for bulls and stopped out many traders who bought the breakout. Price also lost the 200-day moving average, which was another warning sign for bulls.

The month of November was a bit of a roller coaster for metals bulls, as price appeared to breakout, only to reverse on vaccine news and become extremely oversold by mid-December. All the more frustrating was the continued sell-off in the US dollar, which many expected to spark the next leg higher in metals prices, but new lows in the dollar coincided with multi-month bottoms in metals. Meanwhile, all attention has since returned to bitcoin, which broke out to all-time highs while metals remained in consolidation mode. So, where are we now?

In my last post, I commented on the strong breakouts in metals out of bull wedge consolidations. These breakouts were ultimately short-lived and quickly reversed on vaccine news, washing out swing longs and once again pushing price lower to another test of falling resistance. The thesis from that post remains intact – metals continue to remain in strong uptrends with price likely to push to higher highs – but in the near term price continues to digest supply and needs more time.

On the topic of future inflationary or deflationary expectations, there are strong fundamental arguments on both sides. In my simple interpretation, the deflationary camp (dollar bulls) make the case that the economy remains fractured, entire industries are being undermined by the pandemic, there is high unemployment, the personal savings rate is up, the stock market is at stretched valuations, the housing market is approaching bubble territory, and the demand for US dollars remains the prevailing undercurrent of international trade. The Fed, despite its best efforts, cannot seem to meet its inflation target. Further economic weakness or perhaps a market crash would incite a flight to liquidity, demand for dollars to meet debt obligations, and broad debt defaults, further tightening the monetary supply. A strong dollar generally weighs heavily on the price of precious metals, particularly in short-term liquidity crises, and creates the potential for a near term headwind on metals prices.

GOLD

The price coiling I highlighted in gold in my last post failed to the downside, which I mentioned was a possibility. There were two key levels, the 1865-1880 band, and then 1800, which would have retested the entire move. Buyers came in strong at 1865 and price held, right at the 100 day moving average. The breakdown from the pennant has created a bull wedge, and the RSI (relative strength index) never hit oversold levels, which implies to me that bulls remain in control. Gold is not completely out of the woods – a breakout of that bull wedge would confirm that 1865 was the interim low. I am looking for confirmation above 1935 and then 1950 for next sizable move. The price action in silver and the miners confirm this thesis.

GOLD

Since mid-August, sales in the physical precious metals market – red hot at the peak of the COVID outbreak – have begun to taper off slightly. This slowing of demand is directly correlated to price action. I will focus on gold specifically.