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Gold price overbought while silver oversold


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The gold silver ratio highlights that gold is oversold against its precious metal peer, presenting a possible short term trading opportunity

BG_silver_gold_3234234.jpgSource: Bloomberg
 
 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Thursday 15 September 2022 

Gold – technical view

091522_GoldTechnicalView.pngSource: IG Charts

The price of dollar denominated gold remains in a longer-term downtrend at present, with a renewed short-term decline suggesting 1680 and 1665 to the next downside targets from the move. There is however the suggestion that the commodity price is now moving into oversold territory.

This implies that traders who are already short might start to lock in profits towards these downside support targets in anticipation of a rebound or consolidation to follow.

Gold – client sentiment

091522_GoldSentiment.pngSource: IG

In terms of client sentiment, 85% of IG clients with open position on gold (as of the 15th September 2022) expect the price to rise in the near term, while 15% expect the price to fall.

Silver – Technical view

 

091522_Silver.pngSource: IG Charts

The price of dollar-denominated silver has recently undergone a rebound from oversold territory. The rebound has taken the price into the middle of what is perceived to be a medium-term range for the commodity’s price. The rally could be nearing an end with the bearish candle stick reversal and overbought signal suggestions.

Silver – client sentiment

 

091522_SilverSentiment.pngSource: IG

Ironically, client sentiment data for silver also shows that 85% of IG clients with open position on the commodity (as of the 15th September 2022) expect the price to rise in the near term, while 15% expect the price to fall.

Gold vs Silver

091522_GoldvsSilver.pngSource: IG Charts

In addition to the oversold suggestion on gold and the overbought suggestion on silver, the relationship between the two securities appears to have deviated from its mean over the near term.

The above chart shows a gold chart (top window) with a relative strength comparison (RSC) indication (blue line) against silver. The RSC trading below the lower Bollinger band shows that the price of gold has seen a sharp underperformance (more than two standard deviations) against its precious metal peer silver.

We maintain our view that over the short term we could see a normalization of the relationship between these two securities with gold now starting to outperform silver.

An outperformance could occur in one of three ways:

  1. The price of gold rising while the price of silver falls
  2. The price of gold rising faster than the price of silver rising
  3. The price of gold falling slower than the price of silver falling

Should this trade consideration play out, the expectation is for a net gain between the long gold position against the short silver position to yield around 5.8%.

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