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Gold and silver have played an important role throughout money's history. Unlike modern currencies, precious metals can't be created out of thin air and derive value from their scarcity.

GOLD

The price coiling I highlighted in gold in my last post failed to the downside, which I mentioned was a possibility. There were two key levels, the 1865-1880 band, and then 1800, which would have retested the entire move. Buyers came in strong at 1865 and price held, right at the 100 day moving average. The breakdown from the pennant has created a bull wedge, and the RSI (relative strength index) never hit oversold levels, which implies to me that bulls remain in control. Gold is not completely out of the woods – a breakout of that bull wedge would confirm that 1865 was the interim low. I am looking for confirmation above 1935 and then 1950 for next sizable move. The price action in silver and the miners confirm this thesis.

SILVER

Like gold, silver never got oversold on the 14-day RSI during the recent selloff, and price similarly bottom-ticked the 100 DMA. A break above the recent high of 24.57 should set up a retest of 26.

GDX – GOLD MINERS ETF

GDX appears to have successfully recovered support at 39. At the moment, the recent sell off looks like a false breakdown from horizontal support, and price has formed a bull flag during this recent consolidation. Like the metals, RSI never got oversold during the sell off. This looks to me like a 2-3 month healthy consolidation in order to digest the explosive gains from the March low. Bulls just need price to stay above 37.

GDXJ – JUNIOR GOLD MINERS ETF

The junior gold miners look even better than the majors. The entire selloff has been a simple retest of the breakout from the 2016 high. Like GDX, price has just been consolidating for 2-3 months and has formed a bull flag into support. RSI never got oversold during the selloff. Bulls want price to stay above 52.

GOLD/SILVER RATIO

In a bull market, we want to see silver outperforming gold on a relative basis, which implies a lower ratio. In the chart below, we can see that the trend remains down, and the ratio is pushing up against falling resistance. A breakout in price should send the ratio falling back towards a retest of the 68 level. In this case, we notice that the RSI was “oversold”, meaning the downward fall became extreme, and the pullback never hit overbought levels, which implies that the downwards pressure is prevailing. These signs indicate silver outperformance, which is far more prevalent when prices are rising than when they are falling. A breakout of this ratio would imply a skew towards risk off, which would be less bullish generally.

GOLD

Since mid-August, sales in the physical precious metals market – red hot at the peak of the COVID outbreak – have begun to taper off slightly. This slowing of demand is directly correlated to price action. I will focus on gold specifically.

A closeup of the gold chart shows a narrowing and tightly wound price coil of lower highs and higher lows. This narrowing trading range has formed a symmetrical triangle (pennant formation) that probabilistically favors a move in the direction of the underlying trend (60/40). At present, the equilibrium in the market is notable: price is sandwiched between the anchored VWAP (volume-weighted average price) from the August high to the August low, slightly above the 50-day moving average. Price remains in the center of a price channel formed by the March high/low. Relative Strength (RSI) is static at 50, right in the middle of its range. Periods of tightening price equilibrium and consolidation are healthy in uptrending markets as the market digests new prices. As we approach the apex of this coil, gold appears to be setting up for a very big move.

The downside risk remains on a break of $1930 to $1880, and then possibly a full retest of the breakout at $1800. At present, this looks less likely to me. Meanwhile, a breakout above $1980 would setup gold on a path to $2300. Resolution is coming soon - likely late September/early October.

As always, we would love to hear your feedback.

In a stark reversal from the collapse of nearly every market just six months ago, the winds of inflation have pushed the sails of those same markets back to new (or near) all-time highs. The rebound from Covid has been a V-shaped recovery, not an L-shaped, W-shaped, U-shaped, or some-other-letter shaped recovery. The move in asset prices should not be conflated with an underlying economic return to normalcy - far from it. The rebound is simply a commentary on price.

Let’s start with my favorite markets - precious metals:

GOLD

Gold punched in new all-time highs in early August and remains in a strong uptrend. Price now appears to be correcting, which is healthy as the market looks to be building a base for another run higher. I expect price to push up to 2230 and then 2300, but I am not ruling out a significant pullback first. Downside support levels come in around 1900 and 1800. The latter level is the more significant support area in my opinion.

The defining characteristic of the move this year has been volatility. In the long term chart of volatility below, we see that gold volatility broke out to 10 year highs, retested the breakout, and now remains elevated. I expect more volatility ahead.

GDX

Similar to gold, the gold miners recently broke down and appear to have put in a lower high in recent days. This looks to me like another leg down - the C-wave of and A-B-C correction - is in the offing. Once again, I think this is healthy, as miners work off overbought conditions to set up another run higher.

SILVER

Silver, like gold, remains in a strong uptrend, but the market is now showing some signs of exhaustion. The danger here is that silver can plummet through key support levels around $26, $23, and $20 and still remain in a strong uptrend. I would like to see silver consolidate above $26, but a big shakeout is not out of the question.

Similar to gold, silver’s price has been characterized by volatility. Not only did volatility break out of a decade long channel, but it hit levels never before recorded. I expect volatility to remain high.

S&P 500

Despite every conceivable reason to be bearish equities, from disease to rioting to murder hornets, the S&P500 just hit all-time highs this week. In my opinion, a clean breakout would be very bullish, and my thesis posted earlier this year for the S&P500 to hit 4600 long term would be back on track.

COPPER

Dr. Copper seems ready to support the bullish case for equities. Price just broker out today above 3.00, which has acted as horizontal support/resistance numerous times over the last several years, but more importantly coincides with 10-year falling resistance. A breakout here is not insignificant.

COPX

The global copper miner ETF, COPX, also seems to support this copper breakout. It, too, is now nipping out above 10-year falling resistance.

LUMBER

The commodity boom doesn’t stop there. Lumber, which was decimated in March, has not only recovered the entirety of the decline, but is now trading at all-time highs and seems poised for a run to the 261.8 Fibonacci extension at 895.

HOMEBUILDERS

If lumber prices are spiking, we would expect homebuilders to be doing well also. Sure enough, homebuilders (XHB) have also recovered the entirety of the decline and have also pushed to all-time highs.

Another home construction ETF, the ITB, is also at all-time highs, having recovered entirely from the March swoon. Housing is on fire right now all over the country.

MORTGAGE BACKED SECURITIES

Adding further fuel to the fire of the housing market has been ever lower mortgage rates. The Mortgage-backed Security ETF, MBB, is sitting on the throwback to the 2015 highs and looking to break out of a bull flag. A breakout implies lower rates ahead and supports the moves in lumber and the homebuilders, and generally support much higher home prices.

The precious metals market is very clearly in a secular uptrend and prices look poised for further significant upside into the end of the year. My technical view is that in the short term prices have gotten a bit extended and that a pull back/consolidation is due (and healthy) to build the base for the next leg higher.

GOLD

As I stated in my last post from July 8th: “I have always viewed the $1800 price level in gold as more significant than the $1910 blow-off top in 2011. The price level at $1800 was the multi-month, triple tested resistance level that precipitated the six-year base. If price holds, the breakout above this level is secular and very bullish.”

This past week December gold futures eclipsed $2000 and the front month August contract peaked just shy of the 127.2 Fibonacci extension. When this level breaks and holds, my text target is $2260 at the 161.8 Fibonacci extension. However, with the 14-period RSI in extreme overbought conditions, eclipsing 86 for the highest on record, and with bullish sentiment frothing, the timing seems ripe for a pullback (even if just a modest one).

For a more granular view, the August front month contract has been trading in this channel since February, and is also now approaching the upper bound. A logical place for a reentry to add to longs would be a small consolidation to rising support.

SILVER

The level to watch in silver is $26 (the July high was 26.27). The $26 level was triple tested support in 2011-2012 and is now acting as resistance. This is also the 38.2 Fibonacci retracement from the peak in 2011 to the the 2015 low. The risk/reward favors a long position above $26 or on a retest of the $19.80 breakout level. Price could get choppy in between as the market digests the recent moves. When price breaks out above $26, the next key targets are $33 and $35 (the 61.8% Fibonacci retracement).

US DOLLAR

The US Dollar supports the metals thesis, acting as the inverse of metals price action. Big picture, in July, the US Dollar broke down from its 12-year rising channel (and diamond top pattern) and all technical indications look bearish.

However, in the short term, price is likely to push back to at least 94.60 as the dollar works off extreme oversold conditions and historic bearishness to retest prior support.

We are looking for further metals strength and dollar weakness as we head into the fall. As always, we welcome any feedback and comments.