Gold Technical Analysis – How Do Professionals Trade Gold?

Professional money managers use several technical, fundamental, and sentiment indicators to determine the future direction of gold prices. The Metal is both precious and industrial and is viewed as both a commodity and a currency. The yellow metal, as it is often referred to as, is generally quoted in US dollars and trades both as an exchange-traded instrument as well as over the counter.

Table of Contents

How Do Professionals Trade Gold?

Gold is considered a safe-haven asset that appreciates in value when investors are looking for an alternative to other currencies that are depreciating. When interest rates are declining around the world, the demand for a currency that will sustain its value provides a backdrop for rising gold prices. Gold is traded in the cash, futures, and forward markets.

Gold has a forward interest rate, like dollar rates or Euribor rates. This interest rate called the GOFO rate increases relative to the US dollar when gold demand rises. Officially, the Gold Forward Offer Rate, or GOFO, is the interest rate at which contributors are prepared to lend gold on a swap against US dollars, they can use gold as collateral and potentially pay a much smaller rate of interest to borrow the cash than otherwise.

Cash, futures, and forward traders will evaluate three dimensions that provide them with a view of the gold market. These include the technicals, the fundamental backdrop, and sentiment.

Technical Analysis of the Gold Market

Professional gold investors attempt to analyze the long-term trend in gold prices by evaluating a weekly chart. Gold prices trend and trade sideways like other capital market instruments. By using different tools you can determine if the price is likely to trend or remain in a range.

Weekly continuous gold futures prices in August 2021are trading sideways to lower based on its position relative to the 50 and 10 Weekly Moving Averages.

Momentum is confirming this assessment as the MACD (moving average convergence divergence) index is generating a crossover sell signal, while the relatively tight distance between the moving averages suggest nearly flat momentum. The indicator is also suggesting momentum may be getting ready to accelerate.

The MACD is a very useful momentum index that uses moving average to generate a crossover signal that describes when positive as well as negative momentum is accelerating.

Weekly Continuous Gold MACD
Weekly Continuous Gold MACD

Momentum is Important

An often used momentum indicator is the Relative Strength Index (RSI). This momentum oscillator describes whether prices are accelerating relative to the last 14-periods.

After peaking during the week-ending August 7, 2020, the RSI has been trending lower. With a reading of 70 the high threshold and a reading of 30 the low threshold, the current reading of 47.56 indicates nearly flat momentum with a slight bias to the downside. Bullish gold traders are now waiting for the market to cross over to the strong side of the 50 level. This will give them an early jump on a shift in momentum to higher.

The key to using the RSI is to look at prior highs to determine how far momentum has accelerated in the past. The weekly RSI has hit levels of 82, 77 and 75 in the past, which means that positive momentum can still accelerate over the upper threshold at 70 as gold prices break out.

Weekly Continuous Gold RSI

Gold Market Sentiment

There are several ways to determine market sentiment within the gold market. One of the best indicators is using the Commitment of Trader’s report released by the Commodity Futures Trading Commission (CFTC). This report helps traders understand market dynamics.

The COT reports show position data that is reported by category. This information is reported to the CFTC by brokers and clearing members. While the actual reason that a trader has a position is not reported, experts make certain assumptions that provide information about those positions.

Gold Committment of Traders

Positions are reported by category. For gold futures and options, the categories include swap dealers, managed money, and other reportables. Swap dealers include banks and investment banks as well as industry-specific merchandisers. Managed money includes hedge funds, pensions funds, and mutual funds. Other reportables is retail trade.

The CFTC staff does not know specific reasons for specific positions and hence this information does not factor in determining trader classifications. For example, the CFTC does not know if a swap dealer is taking a speculative position or hedging risk. What experts need to evaluate is why positions are increasing or decreasing.

Gold Committment of Traders Small and Large Speculators

Professional traders generally assume that all the swap dealer positions reflect hedges from deals transacted with gold producers and refiners. Those positions are offset with speculative positions taken by managed money.

Managed money takes positions that provide you with information about sentiment. There are two concepts that you need to evaluate. The first is a trend in place. If the COT information shows that managed money or large specs are increasing their long positions, sentiment toward gold is increasing. If they are increasing their short positions, then the negative sentiment is increasing.

The second concept is whether the open long or short positions in managed money is overextended. If managed money is overextended, sentiment is too high and prices could snap back quickly.

Gold Fundamentals

The two most important gold fundamental indicators are the direction of US Treasury yields and whether the US dollar is likely to rise or fall.

Higher Treasury yields or interest rates raise the opportunity cost of holding non-interest-bearing gold. In another way to look at it, since gold doesn’t pay interest or a dividend to hold it, rising or high interest rates make gold a less attractive investment. When interest rates fell to near zero as they did in 2020 – 2021, gold became a more desired asset.

Since gold is priced in US dollars, when the dollar rises, it makes gold more expensive to holders of foreign currencies. This means gold prices need to fall to accommodate the higher cost of purchasing it in dollars. The reverse is true when the dollar declines.

A third fundamental factor to watch is consumer inflation. Gold is viewed as a hedge against inflation, which can be caused by massive stimulus measures. When inflation is on the rise, gold prices will offset increases in a basket of goods or services.

Summary

Gold prices fluctuate weekly, and over the long term either trade within a trend or consolidate. There are several technical indicators, such as the MACD, RSI, and Moving averages that can help you determine the future direction of gold prices.

In addition, professional traders use a combination of technical analysis, sentiment analysis, and fundamental analysis to determine the future price of gold.

Sentiment analysis can include the Commitment of Traders report released weekly by the CFTC.

Additionally, professional investors will track the direction of Treasury yields and the value of the US dollar, which are the driving forces behind the value of gold.

Waiting On Silver

However, an examination of those fundamentals reveals a different picture. That picture is inconsistent with the call for higher silver prices.

SILVER SUPPLY & DEMAND, RATIOS

The supply deficits (gaps in consumption over production) have been talked about for decades. In the 1960s and 1970s they were the principal fundamental justification in the case for higher silver prices.

Throughout the twentieth century, industrial use of silver increased to the point where the consumption of silver eventually exceeded new production. This is the start of the consumption/production gap to which people refer. The government then became a willing seller in order to keep the price down. The specific purpose was to keep the price from rising above $1.29 per ounce. This is the level at which the amount of silver in a silver dollar (not Silver Eagles) is worth exactly $1.00.

The huge price gains for silver that occurred in the 1970s were largely attributable to years of price suppression prior to that. Those years of price suppression, though, were preceded by decades of price support.

Neither price suppression, nor support, are significant issues at this time. The primary imbalance in supply and demand was corrected in the 1970s. If it hadn’t been, the silver price might be much higher than it is.

Expectations for a return to a 16-1 gold/silver ratio will go unfulfilled. The gold-to-silver ratio that existed one hundred fifty years ago was mostly the result of political influence and appeasement. There is no fundamental reason which justifies any particular ratio between gold and silver. (see Gold-Silver Ratio: Debunking The Myth)

Gold to Silver Ratio – 100 Year Historical Chart

gold-to-silver-ratio-2021-07-25-macrotrends

As can be seen in the chart above, the gold-to-silver ratio continues to widen in favor of gold.

SILVER FUNDAMENTALS

Silver is an industrial commodity. Its primary demand is driven by – and its price is determined by – industrial consumption. Any role for silver as a monetary hedge is secondary. This is true even in light of the significant increase in the amount of silver used in minting bullion bars and coins; particularly Silver Eagles.

The fundamentals simply do not support the bullish expectations for silver. Also, there are fundamentals that make silver vulnerable to a big price drop.

Deflation is a more likely near-term possibility than hyperinflation. True deflation results in a decrease in the general price level of goods and services.

As an industrial commodity, the silver price would reflect the full brunt of deflation’s effects. The depression-era low for silver occurred in late 1932 at $.28 oz. This low coincided with the stock market’s low.

Something similar happened in March-April 2020, when both silver and stocks declined by thirty-five percent.

Another possibility is that we might continue for several more years with relative prosperity and disinflation. This would not stop further price declines for silver.

SOME HISTORICAL PERSPECTIVE

After it peaked at $48.00 per ounce in 1980, silver’s price declined ninety-two percent over the next thirteen years. It reached a low of $3.57 oz. (February 1993) during the boom years of the 1990s.

It has been ten years since silver last peaked at close to $50.00 oz. At the current price of approximately $25.00 oz., silver is cheaper by one-half. This is shown on the chart (source) below…

Silver Prices – 10 Year Historical Chart

historical-silver-prices-100-year-chart-2021-07-25-macrotrends-2

Given that, does it matter much that silver has doubled in the past year. All of that increase is just a matter of recovering some lost ground.

Historically speaking, most of the reasons people give in support of dramatically higher silver prices, lose credibility when one looks at the facts.

CONCLUSION

Silver is ineffective as a monetary hedge because it is not a store of value. Silver would need to be over $100.00 per ounce right now to roughly approximate what gold’s current price of $1800 oz. reflects regarding the loss in purchasing power of the US dollar over the past century.

It is not remotely close to that number and there is no historical precedent to expect the gap between gold and silver to narrow in silver’s favor. As long as the US dollar continues to lose purchasing power, the gap between gold and silver prices will continue to widen in favor of gold.

In addition, on the few occasions when silver has increased in price dramatically, it has given up most or all of the gains in short order.

In other words, there is likely more downside ahead for silver’s price. And it could be quite significant.

(also see $100 Silver Has Come And Gone)

Kelsey Williams is the author of two books: $100 Silver Has Come And Gone and $100 Silver Has Come And Gone

Are Silver Prices Really Cheap; And Does It Matter?

Whether it is a deficit in new production of silver or the gold-to-silver ratio, there is always something to talk about; so let’s talk.

Below is a chart (source) of silver prices for the past century…

Silver Prices – 100 Year Historical Chart

silverchartnewarticle

The chart is plotted using average closing prices for spot silver so the peak shown in 1980 is $36 oz., which is an average of closing prices for the month of February 1980. The peak intraday price was $49 oz. in January 1980.

In either case, with spot silver currently under $28 oz., silver is definitely cheaper than it was in early 1980.

That does not, however, make silver a bargain at its current price. The actual average price for the entire year 1980 was $20.98 oz. With the average closing price for 2021 at more than $26 oz., then silver is more costly by an average of $5 oz., or twenty-four percent.

The two parallel lines identify a price zone for silver between $20 – $40 oz. The total time that silver prices were actually within that range or higher amounts to less than five years.

Since the chart includes a total of 106 years, that means silver has traded at prices below $20 oz. for more than ninety-five percent of the past century.

Conversely, we might say that silver at $27 oz. is not cheap. In fact, after adding the exorbitant premiums that accompany the purchase of physical silver (Silver Eagles, junk silver coins, etc.), silver is quite expensive; more than almost any other time shown on the chart.

However, a realistic assessment of silver prices is not complete unless we consider inflation-adjusted prices. Here is the same chart as above, but with silver prices adjusted for inflation…

Silver Prices – 100 Year Historical Chart (inflation-adjusted)

silverchartnewarticle2

In the chart above, the same parallel lines of $20 and $40 are shown. On an inflation-adjusted basis, most of the price history for silver is still under $20 oz.

An imaginary line at $30 oz. compares more closely to the $20 oz. in the first chart and reinforces how significant the recent $30 oz. stopping point is in silver’s price history.

Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years. After adding premiums for actual physical silver in various forms, the acquisition price approaches $35-40 oz.

Some will argue that expectant price increases for silver will make any of this type of analysis unnecessary, or moot. However, the reasoning behind those expectations are more grounded in fantasy than actual fundamental fact.

SILVER SUPPLY-DEMAND GAP

One of the so-called fundamentals that seem to attract unwarranted attention is the supply-demand gap in production (mining) of silver relative to consumption.

“The gap in consumption over production that existed in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.” (see No Silver Lining Here)

GOLD-TO-SILVER RATIO

Another favorite argument trumpeted in silver’s behalf is the reliance on a return to gold-to-silver ratio of 16:1. The ratio currently stands at 67 and was as high as 120 last year. Below is a chart of the ratio…

gold-to-silver-ratio-2021-05-21-macrotrends

Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For more than fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16:1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold and $1.29 per ounce for silver.

“There is no fundamental reason which justifies any particular ratio between gold and silver.” (see Gold-Silver Ratio: Debunking The Myth and Gold-Silver Ratio And Correlation)

SILVER – WHAT NOT TO EXPECT

SILVER – WHAT NOT TO EXPECT

  1. Don’t expect silver to outperform gold. Gold is real money and its higher price reflects the actual loss in purchasing power of the US dollar. As long as the dollar continues to lose purchasing power, the price of gold will continue to move higher relative to silver.
  2. Don’t expect silver’s price to rise if stocks collapse. A collapse in stock prices more likely would usher in hard times economically; maybe recession or depression. Silver is primarily an industrial commodity, so it is very price sensitive to economic slowdowns. When stocks fell at the onset of Covid-inspired closures and shutdowns last year, the price of silver fell by a larger percentage, before moving higher along with most everything else.
  3. Don’t expect silver to rise above $30 oz. and stay there. That would be a refutation of everything we know about silver historically.
    Don’t expect a special circumstance or event to void any of the above.

SILVER – WHAT SHOULD YOU DO?

What you do depends on your reasons for owning silver.

  1. If you own silver and are expecting large-scale fantasy price increases, reread this article and the other ones referenced.
  2. If you got in early on the latest upswing and have some nice profits, take them.
  3. If you own some silver coins against the possibility of a collapse in the US dollar, keep them and go about your business.
  4. If you have larger amounts of wealth you want to protect, consider gold. It is a much better choice.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Silver Takes Charge with Gold a Reluctant Follower

What is our trading focus?

Spot Gold (Ticker: XAUUSD)
Spot Silver (Ticker: XAGUSD)
Gold/silver ratio (Ticker: XAUXAG


Silver broke out of its triangular formation yesterday to record its best day since February 1 when it briefly spiked above $30. Gold meanwhile got rejected once again as it continues to struggle finding enough momentum to break above the key $1800 level. Overnight both trades softer with the stronger dollar off-setting a ten-week low in U.S. 10-year real yields at –0.83%.

Rising growth expectations together with the prospect for governments supported infrastructure plans as well as the green transformation and reflation focus have all helped drive a strong rally across industrial and platinum group metals in 2021. Silver has been caught between two chairs with the market struggling to work out whether the impact from industrial metals should hold a bigger sway than struggling gold. The latter due to its sensitivity towards movements in rates and the dollar, both of which up until recently had been going higher.

On the back of the recent strong performance across industrial metals, silver ended up taking the lead with yesterday’s trigger being the combination of weaker than expected U.S. ISM Manufacturing and higher ISM Prices Paid. The renewed pull from surging industrial metals can be seen through the gold-silver ratio which has been in a downtrend during the past month. From above 70 ounces of silver to one ounce of gold on April 1 it has since declined to a seven-week low at 66.5.

Comment from Kim Cramer Larsson, our technical analyst:
“Silver rallied almost 4% yesterday and closed above the resistance level around $26.65/oz, thereby confirming the uptrend which started back in early April. RSI is above the 60 threshold which support the bullish sentiment and only a close below $25.7 will demolish this short-term bullish scenario.”

Source: Saxo Group

While the double bottom in gold was confirmed on the recent break above $1765, the lack of follow-through and now multiple rejections below $1800 has left traders somewhat bewildered. The short-term technical outlook however still looks promising above $1765 and a break above $1800 could signal a move towards the $1818 and $1833, an area that undoubtedly would begin to shake out long-held trend following short positions.

 

Source: Saxo Group

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire