by Peter Chicarielli, Schiff Gold:
After a big miss on the Powell/Brainard nominations in November, the price analysis has been fairly accurate. Identifying the initial breakout above $1800, mentioning that $1900 was fragile support, and last month concluding that gold had found a bottom around $1800.
For the past month, gold has been consolidating within a tight range around $1850. The data suggests the next move is most likely up. Lots of indicators have bottomed, which leaves little downside remaining. The market has also priced in an extremely aggressive Fed and held up very well over that time.
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It’s very possible that jobs data in two weeks will be weak. This could give the Fed the cover needed to start rolling over, proving that the Fed may be close to done on its inflation fight. Silver looks less promising in the immediate future, but should follow gold over the medium and long-term.
Resistance and Support
Gold has carved out a very nice bottom in the last month above $1800 and staying closer to its current resistance of $1850. It’s been making more attempts at $1850 than $1800. The conclusion last month was “Neutral” waiting for a break above $1850 or below $1800. While a break above $1850 might not be immediate, it seems far less likely that $1800 will break to the downside.
Silver is also stuck in a range between $21 and $22. The price action is not as bullish as it has made volatile attempts on both sides. It currently sits at the lower end of the range with no clear signal on which direction is next.
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
The 50 DMA ($1868) still sits above the 200DMA ($1844) but is moving down with the price below both. This is very typical and healthy in bull markets. A previous analysis highlighted how rare it is to see a dramatic and consistent pull-away from the 50 from the 200. The retest helps build stronger support in bull runs. While the current price sits below both averages, the pull-back looks to be in a bottoming phase.
Figure: 2 Gold 50/200 DMA
The silver 50 DMA ($22.44) has crashed back below the 200DMA ($23.39) forming a death cross. This is a bearish indicator. While silver typically follows gold, the death cross should not be ignored. It’s possible that in a recessionary environment, silver could get sold harder as an industrial metal versus buying on monetary security. Gold is less prone to such an outcome.
Figure: 3 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.
Current open interest is hovering near the lows over the last two years (around 500k) but the price remains in the middle of that range ($1825). This means there is less downside potential and more dry powder that could push the price to new highs if it breaks through upper resistance.
Figure: 4 Gold Price vs Open Interest
Silver open interest is near the lows not seen since March 2014 (except for the March 2020 flash crash) yet the price remains much higher than at any point over that time period. Similar to gold, this means there is dry powder and not much more selling pressure left.
Figure: 5 Silver Price vs Open Interest
Margin rates have stayed flat ever since they were raised to $7200 in the wake of the massive price surge in March. Given where open interest sits, it seems more likely margin would be lowered rather than raised at this point. They may also want to give themselves more ammunition to increase rates if the price jumps again. Lowering rates would be a tailwind.