Price Analysis: Gold Diverges from Bonds as Critical Test Looms at $1800

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by Peter Schiff, Schiff Gold:

The analysis last month showed that selling exhaustion may be near. Since then, gold continues to be range-bound between $1750 and $1800 seeing solid resistance and support, while Silver has shown a mini-breakout. The $1800 level is in play this week and could open the door for a big move if it gets through it soon.

More importantly, gold and bonds have shown a strong divergence in October which is a very bullish sign. Finally, the gold miners have made a strong move up but hit against solid resistance this week ($33 on the GDX). Is the recent action in the GDX a short-covering rally or the start of the next big move up? Obviously, no one knows for sure, but more indicators are starting to turn bullish.

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Resistance and Support

Gold

After the “hawkish” Fed meeting in June, gold saw a major correction causing it to fall from $1900 to under $1800 in a matter of days. Since then, gold has been stuck around the $1800 level. Any move too high ($1810-$1835) gets sold quickly and any deeper pullbacks ($1750-$1770) get bought.

The latest week saw another failed retest of the $1800 level. After spending most of the week slowly moving higher, the price finally burst through $1800 Friday morning and even hit $1813. Unfortunately, when Powell said the Fed was still on track to taper, gold fell back through $1800, finishing the week around $1792.

What appeared to be a bullish move (breaking through $1800) quickly turned bearish. Another failed attempt to break through $1800 means the bulls need to find momentum quickly or risk seeing $1760 again (or lower). If gold can reclaim $1800 early this week, it will create bullish momentum. The more time it spends below $1800, the more likely it retests support.

Outlook: Bearish unless gold reclaims $1800 very soon

Silver

Silver followed a slightly different path since June. While gold found solid support, silver continued to make lower lows. It went from $28 down to $21.48. As the chart below shows, the moves were highly correlated with moves in gold but were not as range-bound.

Silver has also seen a much stronger bounce off the lows, up above $24 and closing at $24.45 on Friday. This represents an almost 14% move up off the lows. For silver, holding the $24 level has become critical to maintaining bullish momentum.

Outlook: Slightly bullish, but needs above $25 to confirm

Figure: 1 Gold and Silver Price Action

Daily Moving Averages (DMA)

Gold

The 50 DMA is still sitting below the 200 DMA, but moving upwards. Due to the range-bound nature of gold since June, the 50 and 200 DMA have not been stuck this closely together for at least 10 years.

As the chart below shows, the 50 DMA tends to overshoot and undershoot the 200 DMA. The market is clearly looking for a catalyst to move out of this tight consolidation range. When it breaks through, it could make a very big move in a short amount of time.

Even though 50 is still below 200, the activity is starting to look bullish. The market has already priced in all the bad news: QE to end by mid-2022, possible interest rate increases in 2022, etc. Unless the Fed came out with more aggressive monetary policy (unlikely), the news is likely to favor gold (as stagflation becomes more evident).

If the market has fully digested Powell’s taper comments (TBD this week), this is starting to look like a bullish setup. The market looks like a coiled spring ready to pop!

Outlook: Surprisingly bullish

Figure: 2 Gold 50/200 DMA

Silver

Silver has more work to do in order to get the 50 DMA above the 200 DMA. This chart still looks bearish, but the bulls do have a few things going for them.

First, the 50 DMA has finally started to turn upwards (hard to see on the chart, but it has).

Secondly, looking over 10 years, the magnitude of the 50 DMA move below 200 DMA looks like an oversold situation. Unlike gold, the two averages have not been close together. Such a big move is usually followed by a reversal.

Finally, the current activity almost looks like a reverse of the 2013 big move down. In 2013, after a big move down, there was consolidation followed by continued downward momentum.

Even with these three potential bullish stories, the overall chart still looks bearish until silver’s 50 DMA can really start to push through the 200 DMA.

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