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