Buying Pullbacks in Silver & Gold

By: Avi_Gilburt

By Andy Hecht : After a very bullish summer, it was a week of reversals in the metals markets. The impact of gravity hit the gold and silver markets late last week after both had made new highs. Meanwhile, copper went the other way as the early week new low led to a significant price recovery by the end of the week.

The daily chart of December gold futures highlights the move to a marginal new high at $1566.20 on September 4 that gave way to the selling that dropped price by over $50. Gold has held the $1500 level so far, but time will tell if the reversal on the weekly chart brings a new wave of selling next week.

Price momentum and relative strength metrics crossed lower from overbought territory. Open interest had risen to a new record high at 643,563 contracts on September 4, the day gold made its high. The turn to the downside caused the metric to decline to 618,240 contracts at the end of last week. Falling open interest and price is not typically a validation of an emerging bearish trend in a futures market. Daily historical volatility spiked up to over the 20% level on September 6 as gold volatility tends to move to the upside during corrective periods.

Silver’s ascent and descent were dramatic. The daily chart of December silver futures illustrates the explosive move that took silver to a high at $19.75 on September 4 that gave way to a late-week implosion that took the price to $18.045 per ounce. Open interest had begun to decline during the move to the upside as it fell from a high at over 243,000 contracts at the start of August to under 230,000 during the middle of last month. The metric moved back to a lower peak at just under 240,000 contracts on August 27 and declined to 216,682 by the end of last week. Some speculative longs likely took profits during the move to almost $20 per ounce on September 4. Momentum and relative strength metrics during lower in overbought territory and daily volatility spiked higher to over 44% as daily price ranges expanded to the widest level in years last week. While gold put in a bearish reversal on the weekly chart last week, silver did not as it would have needed to close at under the $17.495 per ounce level.

The copper futures market went the other way as the price moved from under $2.50 and a new low to close the week above $2.60 per pound. The price action in the precious and base metal came on the back of the news that trade negotiations between the US and China would resume. The roadblocks put in place by the UK Parliament to prevent a hard Brexit lifted some of the market’s fears and uncertainty. And, while interest rates continue to decline around the world, the US Fed may not be as aggressive as the President desires at its September 17-18 meeting.

Over-extensions of gold and silver to the upside and copper to the downside led to the reversals at the end of last week. However, many of the factors that caused the recent moves remain intact, and time will tell if the about-face in price direction is only a temporary event.

Long-term technicals & fundamentals continue to point higher

In the gold and silver markets, the longer-term technical and fundamental pictures remain supportive of prices. The quarterly gold chart shows that the trend remains higher after the June breakout to the upside. Price momentum and strength continue to trend higher despite the late week selling in the yellow metal.

The long-term silver chart is even more bullish as momentum and strength shifted higher and have lots more room on the upside. Silver has yet to break above its 2016 high which would foster readings in overbought territory.

I continue to believe that the next leg in bull markets in the two precious metals that started in the early 2000s are underway. From a fundamental perspective, falling interest rates around the world are bullish for both gold and silver. Gold has rallied to a new all-time peak in almost every currency except for Swiss franc and US dollar terms. The rally in gold is a commentary on the overall devaluation of fiat currency instruments, and that is a trend that is not likely to change in the short-term.

The greed period in precious metals turned to fear late last week. Like in a game of musical chairs, the music stopped at $1566.20 in gold and $19.75 in silver on the December futures contracts. The buyers that joined the bullish party late were facing losses on Friday with gold at under $1520 and silver at just over $18.10 per ounce.

The one thing I have learned, the hard way, after trading these two metals for almost four decades is that buying rallies can be an excruciating exercise. New highs are times to take profits on a scale-up basis, and significant corrections offer the opportunity to step up to the plate and repurchase the precious metals. Unfortunately, the human emotions of fear and greed often drive traders and investors to buy when markets are peaking and sell on days like September 5 and 6. Trailing stops can be useful tools and capital savers during wild bull markets.

The upside potential above critical resistance in silver

I continue to believe that gold will work its way to $1600 per ounce and higher by the end of 2019. In silver, my opinion is that a move to above the July 2016 high at $21.095 will come sooner rather than later. Fundamental factors continue to make me a devoted bull when it comes to the gold and silver markets.

The central banks of the world are addicted to stimulus, and that is not likely to change any time soon. On the trade front, while the market received some positive data on China and reports of a willingness to negotiate, a vast gulf remains between China and the US before any deal would be acceptable to each side. The can may have been kicked down the road a bit on Brexit this week, but the issue is not going away anytime soon. A general election in the UK that occurs after the October 31 deadline would be a second referendum, which could prolong the period of uncertainty when it comes to economic conditions in the UK and EU. Finally, a crescendo of volatility and uncertainty could build as the 2020 Presidential election in the US is likely to be the most contentious and divisive in history.

Gold and silver prices have moved significantly on the upside. The price extensions have created an environment where both metals could suffer significant corrections. It is always a challenge to pinpoint highs during rallies and lows during corrective periods. However, I am far more comfortable buying gold and silver on price dips than rallies, as I believe we have not seen the highs in either metal.

View original article with charts here.

Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER.com. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.

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