This analysis attempts to examine different metrics to understand the current dynamics of the gold and silver markets. This is an analysis of potential price direction in the very short term (1-2 weeks).
In the analysis below, price indicators suggest the correction still has a way to go, but some of the less-watched metrics indicate the correction could be much shallower. Given the data presented below, the latter option seems more likely, meaning the correction may have run most of its course at this point.
Price Action
Both metals have seen very significant rallies since the beginning of March, culminating in a sudden and well-deserved break on April 19th. The correction was quick and strong. The chart below shows that both metals need to fall further to test the two support levels which lie around $26 for silver and $2,100 for gold.
Outlook: bearish
Figure: 1 Gold and silver price action
Daily Moving Averages (DMA)
Gold
Gold has definitely moved ahead and is now well above the 50 and 200 DMAs. Based on the chart below, the best case scenario would be sideways action until the moving averages catch up, but the most likely scenario is another pullback.
Outlook: bearish
Number: 2 Gold 50/200 DMA
Money
Silver follows a similar trend. Historically, price surges do not last and are liquidated quite harshly in the weeks that follow.
Outlook: bearish
Number: 3 Money 50/200 DMA
Comex Open Interest
Gold
This is where things get interesting. Only the first leg of the rise was driven by an increase in open interest. The second rise was actually occurring as open interest was decreasing. This means that futures traders had already given up on the rally by mid-March before prices really took off. These merchants have already made a profit, which means their sales are likely exhausted. Additionally, there is now liquidity on the sidelines that can fuel the next rally.
Outlook: bullish
Figure: 4 Gold price versus open interest
Money
Silver is different from gold here because open interest and price action were much more correlated during the price surge. Open interest remains high compared to recent history, meaning more sellers could come in quickly if prices don't hold up here.
Outlook: neutral to bearish
Figure: 5 Silver Price vs. Open Interest
Margin rate and open interest
The CME uses margin requirements to dampen the futures market. This is usually done to stop explosive bullish moves and contain them, but can be used in rapid bear markets because both short and long positions are subject to margin requirements. Increasing margins force traders to invest more capital or sell contracts to meet needs. Money managed (see CoT Report) are more sensitive to margin increases because they tend to be more leveraged and capital constrained, so margin increases usually force them to liquidate their positions (if they are long, prices fall as they sell, and if short prices increase). More often than not, traders are long and higher margins lead to forced selling.
Gold
Margin rates have been pushed to their highest level since April 2021. Margin rates are unlikely to increase much further. They have already had the effect of containing open interest. As noted above, the price continued to increase despite a decrease in open interest and an increase in margin! This means that futures traders were not responsible for the latest rise in the price of gold.. Thus, an increase in the margin could do little to keep prices low if a new increase were to begin. Given that margin rates are already high, the CME's ability to contain the next sharp rise will be limited.
Outlook: very optimistic
Figure: 6 Dollar rate on gold margin
Money
Again, the situation with silver is not similar to that with gold. This market is more like historical instances. This means that any increase in the price of silver will likely be accompanied by a higher margin capping prices.
Outlook: neutral to bearish
Figure: 7 Dollar rate on money margin
Gold miners
Gold miners have consistently dominated the price of gold in both directions for years. That said, miners did not fully participate in the latest gold price rally, further suggesting that traders are not in control of this market at the moment. This is probably not a reliable indicator at the moment.
Outlook: Neutral
Figure: 8 Current trends of Arca gold miners towards gold
The chart below shows the long-term historical relationship. Miners have been absolutely punished over the past decade because stock traders have never bought into the current gold trend. This leaves these stocks deeply undervalued and primed for an explosive move when the price of gold takes off.
Figure: 9 historical trends of Arca gold miners towards gold
Trading volume
The final indicator is trading volume on the CME. This is related but not exactly related to open interest. Higher trading volume with stable open interest may lead to churn. Higher trading volume can also result in an increase or decrease in open interest if buyers or sellers are in control.
In the case of gold, it once again appears that futures traders were not behind the price surge. Trading volume was only slightly above average, but far from comparable to previous price increases. This is clear when looking at the year 2020, when gold last rose alongside trading volume. Once again, it is clear that traders were not behind the latest rises in the price of gold.
Outlook: very optimistic
Figure: 10 Gold volume and open interest
Once again, silver is moving away from gold. It is clear that the trading volume in the futures market has pushed prices up. This means that silver is more vulnerable if traders decide to exit the market or even short it.
Outlook: neutral to bearish
Figure: 11 Money volume and open interest
Conclusion
On the surface, the recent surges in gold and silver prices look a lot like history, where strong price gains run out of steam and are then liquidated over the coming weeks and months. The rest of the data easily aligns with this narrative in silver, but not gold. It is very clear that there is something else going on in gold. The second surge in gold prices did not originate from the CME.
It appears that gold was triggered somewhere outside of the CME and silver traders were then forced to play catch-up. These same traders were ready to sell at the first sign of trouble, as they always do. What they are missing is that the floor on gold should be much higher because there are no gold traders willing to sell. Gold traders who sold were those who jumped on the first price spike (March 1-14). This probably means their sales are almost sold out.
Gold may not immediately bounce back and climb higher (although it may), but it is much less likely that another major decline will be seen in the near term. The rise in gold is much greater than the fall, and silver tends to follow gold.
The data source: https://www.cmegroup.com/ and fmpcloud.io for DXY index data
Data Updated: Every evening around 11:00 p.m. Eastern Time
Last updated: April 30, 2024
Interactive charts and graphs on gold and silver are available on the Explore finance dashboard: https://exploringfinance.shinyapps.io/goldsilver/
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