Chart of the Day – Prospects for Gold And Silver $SLV $GLD

by Enis December 13, 2013 10:23 am • Commentary

Gold and silver are termed precious metals.  They have not been precious for the past 2 years.  Both are down substantially since their 2011 highs (gold around 40%, silver around 60%).  Although the current downtrend feels like it has been going on for years, gold is actually about to register its first yearly loss since the year 2000:

Gold futures, yearly chart, Courtesy of Bloomberg
Gold futures, yearly chart, Courtesy of Bloomberg

That was 12 straight up years for gold – an incredible run.  As is common when these huge runs end, the questions about why gold is going down for the past year have been much more numerous than the questions about why gold was going up for the prior 12 years.

Gold and silver’s persistent downtrend in 2013 has turned most traders bearish, with sentiment quite negative for many months now.  In fact, Tiho at the Short Side of Long blog pointed out that the gross short position among futures traders in gold and silver is at its highest level of the past decade:

Courtesy of Short Side of Long
Courtesy of Short Side of Long

In my view, that’s not necessarily a long-term (measured in years) bullish sign, but I do view it as noteworthy in the short-term (measured in weeks and months).  Moreover, I see a few other technical bright spots in the price action of gold and silver since the June low:

1)  Neither metal has broken its late June low (red), and the 100 day ma (green) has flattened out:

Gold futures daily, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg
Gold futures daily, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg
Silver futures daily, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg
Silver futures daily, 100 day ma in green, 200 day ma in black, Courtesy of Bloomberg

 

2)  Both have registered higher RSI momentum readings on this move lower (red arrow, lower panel), relative to the summer lows:

Gold futures daily upper panel, RSI lower panel, Courtesy of Bloomberg
Gold futures daily chart upper panel, RSI lower panel, Courtesy of Bloomberg
Silver futures daily chart upper panel, RSI lower panel, Courtesy of Bloomberg
Silver futures daily chart upper panel, RSI lower panel, Courtesy of Bloomberg

 

3)  The Silver/Gold ratio has been moving higher since that summer low, an indication of more risk appetite in the precious metals complex as a whole:

Silver/Gold futures ratio, Courtesy of Bloomberg
Silver/Gold futures ratio, Courtesy of Bloomberg

 

Finally, gold has broken its correlation with most other asset classes in the past 6 months, including the dollar.  As a result, I feel more comfortable analyzing the commodity’s price action on its own, without taking into consideration potential side effects (like those that might result from a Fed taper).

Put it all together, and I see good odds of a bounce in gold and silver in the coming weeks and months.  We indirectly expressed that view through our investment position last week, and plan on holding that for a long time to come.