Technical Brief
Gold and Silver are strong today on the back of a weaker dollar (USD/JPY especially) and possibly other drivers. It is important to note that base metals again lead the charge, and this gives us pause on the "legs" today's rally has.That said, we had already recommended a swing-trade Gold buy near the lows last week (restated below) not for the skittish we admit. It is also notable that Silver never got to the levels technically that Gold did. That bolsters our feeling that for whatever reasons (increased retail demand from the spread product, the industrial aspects of Silver etc) the Gold-Silver ratio will continue to shrink in fits and starts. Which brings us to our fear on Silver as proxy for all the metals, precious or base.
Silver- Who is Master, Gold or Copper?
Is its strength relative to Gold telling you to buy it? Or is its strength on the back of a lack of players (and/or people treating it too much like Copper) telling you that the next move on high volume will be lower? We do not know. And so we must do nothing right here.
Interactive chart HERE
Our very real concern as traders here is that if the base metals give up the ghost on some Chinese action, or more dollar strength, Silver will lead in a horrible way lower. The rationalization being, neither of its supporting drivers (industrial and precious) will be in place. The fact that the ratio between Gold and Silver has shrunk to our delight recently does not mean we are celebrating. Concern centers on China's volatile demand of base metals and the USD strength overwhelming the new retail buy-side liquidity created by the CME spread contract. Conclusion is, Silver may lead the next selloff in precious metals. While that will start a pile in on Gold by momo funds selling as well, it should give us a catalyst for a nice rally in December. But until that fantasy plays out, we are just scared of Silver right here. We'd buy options expecting volatility if they weren't such a liquidity roach motel upon exit time.
Here are some technical numbers.
Gold Trade Update
On Nov 23rd, we suggested that Gold was a buy above $1169, predicated on our converse feeling that it was sale below that level. We did not take our own advice sadly, as the market had rallied to much from a proper buy-in level in terms of risk reward. From that article:
However, any level that is a trigger for a bearish momentum player is by definition a support level for a contrarian Bull swing-trader looking for a relief rally. Our last such recommendation was a relief rally that took Gold from $1250 to $1301. It was a strong trade as it was accompanied by a non confirmation in the RSI. FTA Above $1169 Gets a Bounce to $1235- Technical Trade
Today Gold is strong, and we do not see a technical reason to buy it here. Perhaps a level to sell it is coming, as a bear flag shows itself. We'd be inclined to:
Bulls
- Buy a pullback in the $1172-1175 range with a tight stop, accept in the last hour of the day.
- Hope for a piercing of $1165 intraday and then look to buy on a bounce above $1172 as momo funds will have sold it in the hole. Take home if settlement is above $1169
Bears
- Short under $1165 intraday or $1169 at settlement, especially if occurs near EOD
- sell rallies that stall between 1189 and 1201 with stops based on risk tolerance or $1220
Technical Summary
Gold
- Downtrend is intact, given no exogenous events. December does offer several significant events for Gold however. More in follow up a "December to Remember" event report to be posted soon afterwards today.-SK
- Settlement/trade under last Friday’s lows will trigger MOMO sellers to pile on and press for an 1190-1180 area
- Rallies flagging under 1220 will be sold scale-in by trapped longs and short-side accumulators
- Placing trendlines on the RSI helps decrease market noise and does not look positive yet.
- Note the RSI spike and dump breaking the RSI trendline on election week. It is almost (in hindsight) a head and shoulders pattern
- If the RSI gets to the projected trendlines, then that will be a truly oversold market, worth adding to investment portfolios and selling stocks if they have rallied.
- Expect the Gold/Silver ratio’s decline to continue, with spikes higher in thin markets. The new spread products have given Silver bugs a vehicle to express their opinion and they have been doing so. Platinum is also benefiting from the increased liquidity.
- A settlement over 1220 or a trade over 1229 kills the downside.
- A move back into the Bollinger band area is viewed as bullish IF it is not sideways. Therefore we cannot pin our hopes on this now. (we use 1.5 width also)-
- As always, we like the Fibonacci Reversal number as true bull market re-ignition
Silver
- Silver has held its own relative to Gold for several reasons: its industrial aspects, the new Spread contract, and the exodus ofspecs on both sides of the market
- Note that the same technical assumptions in Gold apply here in a broad sense with one difference
- Normally in extreme moves either way, silver outperforms Gold as a function of volatility. But not in this down swing so far
- Silver can move to the 16.00 area with Gold hardly budging.
- We expect that could happen on the back of a base metal crash, likely lead by copper if it happens
- What is worth watching to us is if Gold rallies and leads Silver in the next bull run. That would be a trading opportunity, though the circumstances would have to be assessed at the time of such an event.
- we ar reminded of the wisdom given us by an old GSCI fund manager: "When Silver rallies markedly after Gold, that is a sign that the rally in Gold is almost done.
- Smaller "trend chaser" funds buy Silver due to its "relative value". And that is the kiss of death historically
Good Luck
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