Precious Metals are a fascinating asset class…I have yet to encounter investors who are more emotionally attached to their asset as Gold Bugs besides Bitcoin Bulls. And it is this attachment and emotions that keep us coming back and the market open each week.
From October to February Gold rallied 14% working its way towards the ~$1,400/oz zone that has been the line in the sand for the past 6 years. It was the overall consensus that the big breakout was here and the accompanying price action in individual Miners made it more believable than prior attempts. Since then, Gold has pulled back 5%, sentiment has faded, and individual Miners have rolled over. So what’s next? Let’s dive into a handful of charts that may give us clues.
From a daily chart perspective, many are discussing the potential head-and-shoulders topping pattern in Gold futures. I see it, you see it, but will it work? We’ll just have to wait and find out. Remember, perfectly clear patterns that everyone is talking can rip in the other direction.
As always, there is more than one way to analyze a chart. JC Parets of AllStarCharts is open to the possibility that this could be a reversal…
Now what? pic.twitter.com/GNCAmBA2py
— J.C. Parets (@allstarcharts) April 26, 2019
On a weekly basis, Gold continues to build out a massive base below $1,400, a near ~50% correction since the 2011 highs. Many will say this is a consolidation within the bear market but when in doubt, zoom out and you can see Gold is more likely consolidating within a longer-term uptrend. You can also see the three higher lows in place since 2015. Does it form a fourth soon? As long as price stays above $1,175 that could be the case.
Looking at Silver on a weekly basis, $14 is the key level. The double bottom scenario seems to be in jeopardy as price has pulled back. Does Silver create a higher low? D0 we get a triple bottom? Are those even a thing? Regardless, the 200-week moving average has acted as resistance since the 2016 highs but since 2018 the slope has begun to flatten with price bumping up against it. An upward sloping 200-week moving average is what the bulls want to see.
Regardless, we can agree on one thing: it’s not a bullish environment for Precious Metals until Silver consistently outperforms Gold. Luckily for investors, we can chart these two assets against one another to see that every time the ratio has traded into ~85 over the last 20+ years, we have rolled over sparking a rally in Precious Metal space. Until that situation unfolds, investors should be patient.
If we invert this ratio, we are analyzing the same situation but with Silver denominated in Gold. Chris Kimble, of Kimble Charting Solutions, brings up the important support test. “The Silver-to-Gold ratio is testing 25-year support this month and it looks like it could be creating a bullish reversal pattern. Should the ratio turn higher it would be the first step in creating a more constructive environment for metalheads and gold bugs.”
— Chris Kimble (@KimbleCharting) April 19, 2019
Despite downtrend breakouts in the Gold Miner (GDX) and Junior Gold Miner (GDXJ) ETF’s, the Gold Bugs Index (HUI) has yet to breakout of the 8-year downtrend since the top. This is a truer picture of the mining space and needs to change before investors can feel confident about higher prices going forward. If Gold and Silver are considered large-cap assets, their respective Miners should be considered small-cap assets. If we are in a bullish risk-on environment, the small-caps should be outperforming the large-caps.
Taking a look at the S&P 500 charted against Gold, it is clear that the S&P 500 has been the better choice since 2011. Price is now back to an interesting spot with a large negative divergence looming. What happens next I don’t know but investors should keep an eye on this relationship.
When thinking about Precious Metals, there are four currency pairs that we can look to for clues including USD/EUR, JPY/USD, CHF/USD and AUD/USD. Let’s dive into each.
The US Dollar is generally negatively correlated to Gold and Silver. TCR Contributor Ian McMillan covered the strength in the Dollar last week and I agree with his analysis so I will point you there instead of covering it twice. In February, John Roque was on Technical Analysis Radio Podcast and discussed the correlation between Gold and the US Dollar, which you can read about it here.
The Japanese Yen can be considered a flight-to-safety asset, similar to Gold. Arun Chopra, CFA, CMT of Fusion Point Capital provided the chart below to TCR readers and had this to say: “these two markets have tended to trend together for a while now, really since the financial crisis. Whether that changes remains to be seen.” With a long-term correlation of +0.67, investors should be watching the direction of the Yen for clues on the direction of Gold within this base.
The Swiss Franc is the third currency pair with a correlation to Precious Metals. As Charlie Bilello points out, the Swiss Franc topped in 2011 like Gold and since then has not done much. Investors want to see the 0.97 support zone hold. A breakout from the downtrend would be a positive sign for Gold bulls.
Swiss Franc ETF hit an 8-year low this week, down 35% from its 2011 high.
US 1-Month Yield: 2.42%
Swiss 10-Year Yield: -0.31% pic.twitter.com/AhSjfVJzA8
— Charlie Bilello (@charliebilello) April 25, 2019
Last but not least is the Australian Dollar. The chart below from Chris Kimble highlights a 20+ year trading history. Despite the bear market since 2011 as well, price is at important support. Chris states “the Aussie Dollar decline has brought the currency down to a major confluence of support and is attempting to break down. If this occurs, it would send a negative message to gold and silver metals bulls (and the commodities sector).” Let’s see what happens next.
Another piece of evidence investors could look to is seasonality. As we can see, the coming months may not provide much upside for Gold and Silver’s historical trends. Regardless, seasonality is just one data point and investors shouldn’t let this stop them from taking a trade if it’s there.
— Market_Pulses (@MarketPulses) April 28, 2019
At the end of the day, it’s in our advantage to take a weight-of-the-evidence approach. While the asset we send the ‘buy’ order for determines our gain or loss, if we are not sure whether to send that ‘buy’ or ‘sell’, we can look to other markets for clues. Gold and Silver are at interesting positions right now. We could see a sell-off, a continuation of the long-term trend, or more sideways action. Until the pieces of the puzzle come together, this is a market that investors should wait on.
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