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Gold & Silver in a LT rally

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So I feel like maybe stocks are turning for another rally (in what form etc not sure yet) and EUR/AUD/GBP look set for a rally (USD DX to fall) but what about precious metals?  Since late Jan/Early Feb Gold has been running in opposition to Stocks (classic inverse), while stocks have been rallying Gold has dropped in a retrace action.  Of note, while stocks dropped Gold did not rally but rather went into consolidation.  So Gold is out of favour. 

What could change that?  Well obviously a major stocks (and bonds) crash could do the trick.  Also a period of USD weakness could help the case for a Gold rally.  Hmm, one out of two is not that encouraging.  If the assertions, above, are proved true then Gold will, in all likelihood consolidate again, maybe with a retest of recent breakout points (circa 1,200 area) before any significant rally gets underway.

I note that Gold experience a bearish pin bar on Friday that suggest the next move will be downward, however the overall candle was in the green so not a completely Bearish set up.  Additionally Silver is currently tracing a small consolidation patter with an inside bar set up, which is indicative or a turning point, however these things can break either way in not in an obvious trend already.  Net, alas we could see both these markets retrace further before a strong rally OR they could breakout into that rally from here.  If the former happens there will be good retrace turns opportunities further down, if the latter happens then we will be looking at trading the break through of overhead resistance.  Anything in between is a high risk trade.  (road map lines on my charts are indicative only)

Trading Strategy:

  • I will hold my existing positions stop protected below the key support zones on Gold and Silver, despite my temptation to swing profits now because there is always a chance of a swift breakout of over head resistance.
  • I will look for consolidation (or especially any retest of key support zones) breakout points to emerge and seek to add to my positions when they present themselves as low risk trades
  • I will seek to trade fast strong breakouts of overhead resistance (this time it may not look back - i.e. no significant retest)

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Gold looks to be holding at the Flag support zone but Silver has endured a much sharper decline and is now bouncing off the lower line of a Daily Triangle (blue).  Both could hold here and rally or...  With Stocks retracing back down into Triangles and USD thinking about whether it will rally or drop through it seems like everything is at a critical tipping point.  2 interesting cross market scenarios seem likely candidates:

  1. Stocks rally, USD falls, Gold/Silver rally (or maybe go into consolidation
  2. Stocks and USD drops through support into another Bearish phase and Gold/Silver rallies hard

Interesting times...

My bias is for #1 BTW...

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Silver has returned to the upper Triangle line of the current consol period.  A break out here and of overhead resistance would be very bullish but a rebound off the Triangle suggests a return to the lower line (as described by the support zone around 1415. The 1 hour chart pin bar isn't that compelling just yet, could easily see a test of overhead resistance, which if it holds would establish a trading range.  Breakouts from long term trading ranges are very compelling.  One to watch.  Also, as the saying goes, "as goes silver so goes gold".

On my Gold 4 hour chart I have been tracking the retrace back towards 1,200.  The turn at Fib 50% was compelling but I couldn't rule out a clearer A-B-C formation and so far that is on the cards with a potential turn at Fib78% of the rally retrace on a pin bar.  If the current move up is a 1-2 then the next leg will be hard down towards the Fib 62% (Triangle breakout zone retest - 1,206) or the Daily Triangle breakout zone of 1,200 exact.  I prefer the latter set up t present.

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Quick update on Silver, The Triangle Line doesn't really work as well as a simple trading range set up.  A break out of this range sets up a strong rally scenario.  At this point I am favouring another run back down to support, coincident with a completion of an A-B-C retrace on Gold USD falling and a rally in stocks.  If this happens that speculative longs with close stops at key turning points on Gold and Silver will be an opportunity.  Failing that a breakout of key overhead resistance on the Daily chart will be a major opportunity.  The only issue I see with a speculative trade at the support level is that this range could carry on for a while yet and the moves between the top and bottom can be very choppy so I will not be trading anything within the ranges, nor shorts from the top as my bias is for a breakout into rally.

Trading strategy:

  • Wait for a hit and turn on support level for a spec Long with close stops and, or
  • Wait for a break through of Resistance if consistent with other markets moves and go Long

Thoughts on the trade anyone?

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My views on Gold look like this:

  • There is compelling NMD on the recent top out at resistance so a bearish phase was indicated
  • Maybe this has completed at the Fib 50%, maybe not as the price action is consistent with an A-B-C retrace and a drop back down to Fib 62% or another test of the LT trend-line, time and price action will tell that tale
  • Can't rule out a breakthrough rally from here

Trading strategy:

  1. Hold previous Longs with suitable stop protection to avoid a stop out and rally
  2. Look for price action turn signals at Fib 62% (Triangle breakout zone) or retest of LT trend-line to go Long
  3. Whatever happens (other than a collapse in Gold) trade Long on a major strength breakout of the over head resistance and begin a long term trend following Long campaign.

Thoughts on the Trading ideas anyone?

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The Gold/Silver retrace has been steady, after a Fib 76% rally turn, but has gathered pace on both towards the end of the week and both are now approaching important support zones.  Gold in particular is heading for a retest of the 1,200 support zone, which is quite obvious on the Daily chart and coincident with the breakout of the previous daily chart bearish trend channel breakout.  On the 4 hourly (and hourly) chart this zone can be seen zoomed in.  It also coincides with the apex of the 4 hourly Triangle and the Fib 50% of the whole rally up from the 16 Aug pin bar turn.  So the 1200 area is the lead candidate for this current bearish move to terminate but there is also a chance that the market moved down to retest the LT support trend-line, which is also at the Fib 62% (1190).  There are 2 other turn zones below but I will look at that after I see how the first two do.  Additionally Silver is at an important support zone so for Gold to drop to the lower zones Silver would probably have to break the 11 Sept low and if that happens all bets are off...

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Silver is at an interesting juncture that will surely tell the tale of precious metals, "as goes Silver, so goes Gold".

As suggested previously, Silver seems to be in a trading range consolidation phase.  The point here is not to trade within the range (strictly for day traders that and very precarious on a market like Silver).  The point is to trade the consolidation breakout, always being mindful of false breakouts.

To recap, my Fundamentals assessment is that precious metals are due a rally after a significant bearish retracement off the commodities high of 2011 (Gold made it to the Fib 50% - significant for Gold but Silver put in a touch on the Fib 78%).  Both of these retraces were halted around the LT support trend-line and rallied away into a EW1-2 and then a smaller 1-2 in the case of Gold.  Stocks are under pressure, flight to safety will be to the traditional places: USD, Gold, Silver (possible Yen but not so much I think).

Silver has now retraced to potential double bottom with the last major bottom (my purple 2 - Daily chart @ 1,390 ).  A break below this would call a rally into question.  A break below the 2015 low at 1365 would be bearish.  Because my big picture Fundamentals and analytics are bullish my bias is that Silver will not break low.  Stocks are turning and may have topped out.  USD is rallying, although I can see a short term drop on USD, which would also help push precious metals into a rally (at least short term).

On the hourly chart I have a potential ending Triangle formation into the wave 2 retrace turning zone the second part of the potential double bottom).  The move down confirms to an A-B-C retrace pattern.  There is a small gap on last nights close and reopen, which likely needs to be closed before a rally.  Key point to consider a Long would be the breakout from the Triangle.  I have PMD on last nights close but am wary of a breach of the previous low 1390 as this would give pause for reassessment.  I have stops just below the previous lows.

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Gold breakout into a rally from Daily channel breakout retest & support zone.  If this is sustained then it supports a stocks Bear.

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Silver makes a fresh low beating the 10 Sept low and then immediately rallies out through a short term ending diagonal channel.  I would expect a small 1-2 retest of the channel prior to any major rally but aligned to the strong Gold breakout from support consolidation the odds are good for a strong rally in Silver.

XAGUSD-1-hour_141118.thumb.png.2de8de4497478ca08547cd42be84778e.png

 

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Mentioned Silver just now in the context of USD.  Precious metals seem to be following USD at present and regardless of that the technicals are suggesting a retrace prior to a more significant rally.  Same but smaller on Gold I think.

If we do get this retrace and a bounce at a good support zone and then a fresh higher high this could be a nice Long trade.  A retest of the breakout zone would offer a close stop (low loss potential) Long IF the nature of the price action is consistent with a retrace and not a plunge lower.  Ideally you want to see the bounce first but it could run fast.  May take a while for this to mature, patience is required.

 

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Hi all - just wanted to drop this in as it seems contextual to the conversation. Any questions or comments feel free to add them to the post :) 

 

 

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Very interesting indeed @Caseynotes.  I was at a talk on Gold a few years back when a fund manager, who was pro gold, suggested that the following 3 things needed to be the case for a Bull run in gold:

  1. Interest rate back drop unsettling - tick
  2. Gold rising in all major currencies - is in USD but not sure about others...
  3. Beating the Stock market (SP500) - maybe about to be tick?

 

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Of note may be that this month we have seen a bounce of a LT supporting trend-line on the Monthly chart.  The 4 hourly chart shows the recent bounce after an A-B-C retrace to retest a Daily chart channel breakout support zone.  I do expect to see another smaller bearish retrace move before the Bull rally gets going.

Similar but more extreme set up on Silver.  For me, if one were a it nervous yet about shorting stocks then going Long Gold at a suitable retrace level could be a descent way to play it.

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Adding to your returns comparison chart @Caseynotes the following 2 historic Gold related charts are quite interesting.  Firstly, it is easy to think the 2011 Gold high was all time but it wasn't if you consider an inflation adjusted price chart.  Note also that from 1920 to 1934 gold appreciated almost 3X.  If we saw the same again the price (excluding inflation adjustment - but there might not be any if we are in a depression...) would be $3,600...  1920 is significant as there was a depression, known as "the forgotten depression" in 1921, which was overshadowed by the 1929 one of course.  It is not entirely clear to me what drove the 1970s rally in gold, before my time, but I do remember there was a global oil crisis in the 70s and a lot of geopolitical tensions plus we had Bretton Woods in the late 70s.  Let's say it was not that good a time economically when compared to the roaring 80s...

The second chart is a ratio of SP500 to Gold prices.  I am not a huge fan of technical analysis on ratios charts, preferring primary charts, but some interesting observations on this one as follows:

  • 1933: end of depression (or beginning of it anyway from a financial markets perspective).  Gold high but turns lower vs SP
  • 1940: WW2 Obvs! Gold high.
  • Early 70s, oil crisis, middle east and other geopolitical unrest, nuclear "duck & cover" fears etc etc drives gold prices up to 1980
  • 1980 coincides with the inflation adjusted all time high for Gold and stocks hadn't got going into the post Bretton Woods (i.e. debt fueled) Bull.  Gold high SP low.
  • Then Gold falls out of favour until 2001, dotcom bubble bursts.  and gold begins it rampaging Bull phase, aligned to many major commodities up to 2011 peak (you see that on a standard Gold chart).
  • In terms of a range on the ration chart however the 2011 peak did not coincide with the historic bottom of the ratio range.  Could it be that it hasn't finished its periodic/cyclical journey?
  • From a technical analysis perspective the ratio charts do conform to Elliot Wave theory (again not a big fan but ok).  The wave down is a 1-5 and so far the wave up can be seen as an A-B-C.  From a chartist perspective this current wave up can be seen as a pennant (i.e. at half way) and there seems to be a resistance zone around 2.5-3.0, which is where we are now.  I can't draw a fib but visually looks about a normal retrace level, over 50%)
  • Ok gotta take the technicals with a pinch of salt but still it stacks with my fundamentals picture of Stocks crash, Gold rally.  This is the only thing that would complete the cycle on the ratios chart, unless this time it really is different...

One thing I firmly believe, you cannot break the normal cycles, even though Gordon Brown declared he and Tony B did...  Cycles occur int he natural world.  Humans existing and are part of the natural world (even though we like to think of ourselves as apart of it and of a "higher" standing we are not).  Humans respond to natural cycles without thinking about it (it is sub conscious, instinctive - likes bird heading south for the winter or squirrels storing nuts).  This is why cycles are inexorable, in fact in terms of economic cycles we do it to ourselves and we call it human nature but actual it is just nature.

And (I'm about to turn some if not many of you off now but ok separate this point from the above and just for fun!) that is why Fibonacci retraces work!

Charts courtesy of macrotrends.net

https://www.macrotrends.net/

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Great work @Mercury,  the early 70's are significant to your thesis as the gold spike was due to easy CB money policies to generate employment leading to high inflation and subsequent high interest rates running to around 15%.

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Thanks @Caseynotes, I did not know that background, although I did know about the 15% rates in the UK that led up to the 1987 Black Monday crash...  15%!  Unbelieveable really in the context of ZIRP/NIRP and yet not that long ago.  Hard to believe a so-called developed economy could go from 15% to virtually 0% in just 30 years.  You gotta look at that and say "something is rotten in the state of Denmark..."

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@Mercury,    I knew the 1970's  inflation rate was in the double digits but couldn't remember what so didn't include it for my previous reply so I just looked it up now - still gave me a bit of a shock.

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Nice @Caseynotes, I remember Oil was a big issue alright and times were tough.  Now we are down in the 2%s the question is whether we will get back up to double digits (all that CB activity hardly moved a thing!) or slip onto depression?  My personal view, with no credentials to support my view I hasten to add, is the latter.  Prices are just too high.  Wages are just to low.  Debt is just to rampant in both consumers and corporate spheres.  Now the received wisdom, and many journos have written on this, is hold gold during periods of hyper inflation but the data shows Gold also does very well in periods of depression and market chaos.  So from a purely selfish perspective either is fine with me as I am betting Gold (and Silver) will go on a rampaging bull run.  That said the depression, albeit very painful, is probably what we need to get a proper and lasting rethink and reset of global economics.

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Final historic chart to complete the picture.  Similar to the Stocks analysis but in reverse this time, I wonder what happens to Gold when the Fed reduces its balance sheet and raises rates?  Looks to me like the divergence has to close and probably the 2 curves do a fly by cross over...?

fed-balance-sheet-vs-gold-price-2018-11-21-macrotrends.thumb.png.fd7f5cd3357b0a8933fc73c1c497f5e7.png

 

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Hi @Orion,  how do you want to buy gold on IG? 

Leveraged account speculating on the price of gold, spread bet or cfd? Leveraged shares in a company associated with gold, unleveraged shares? Buy the physical gold?

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@Caseynotes   Well from research, buy the physical gold. Is that possible via IG Index?  I expect the value of Gold to increase so if I cant buy the physical gold, whats the best next option? ETFS Physical Gold? 

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@Orion,  that's right IG don't do the physical and besides there are a lot of costs involved with storage etc. ETFs may well be a good way to go, perhaps our good friends  @TrendFollower  and/or  @Mercury can offer us some sage advice on the subject. 

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@Caseynotes Thanks for the swift reply. While we are on the subject, are we expecting a Global crash soon? (or has it started already). Any POV on crypto? 

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16 minutes ago, Orion said:

@Caseynotes Thanks for the swift reply. While we are on the subject, are we expecting a Global crash soon? (or has it started already). Any POV on crypto? 

Hi @Orion. Personally, I know anything is possible and it doesn't take much to start a panic but I'm not expecting a crash soon with the US economy so strong, GDP near 4%, PMIs in the 60s and record levels of employment. I have grave concerns for the EU though and any contagion from there could cause massive fallout world wide. 

There will need to be some form of digital currency to be used on blockchain in the future but am not convinced any of the present batch of coins will necessarily survive to see it. I have concerns with the whole mining/forking issues that plague bitcoin and that the many spawn of bitcoin also have adopted. 

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Getting back to Gold/Silver trading (and I have no views on trading Gold EFTs except to say that, as I understand it, they are never 100% physical gold backed.  Therefore if you really want to be invested in gold then buy from a reputable gold dealer who will also store you gold.  Sharps Pixley is the one I know best.  Check out their website.)

So far Silver (and Gold to a lesser extent) have begun the retrace I was expecting.  I think this is not yet completed and given the spiky nature of Silver we could easily see a retest of the recent triangle breakout zone (wave B) before a further drop to support and rally.  This would fit with a mirror image rally and drop on stocks (see my recent US Stocks post) although it is not clear whether there is any correlation yet...

Unlike @Caseynotes I view US economic growth as anemic when you consider the level of QE and the time-frame over which interest rates have been at ZIRP or NIRP.  A few reasons this is the case in my opinion are:

  • QE has mostly gone into capital asset appreciation rather than real economy and the concept of trickle down economics is ivory tower thinking - the gap between rich and poor has massively increased (entirely unhealthy for society in general)
  • Low interest rates have not encouraged real investment but a focus on M&A and share buybacks (at the top of the market) as CEOs seek to financial engineer their share prices and consequently there bonuses
  • Consumers and companies are over geared (the lessons of the credit crunch have not been learned nor the issues addressed).  We are seeing this in poor retail conditions as consumers cease to spend (watch for Black Friday results!) and poor wage growth because companies are on a cost cutting footing as top-line growth does not materialise
  • The much vaunted employment growth is largely driven by the gig economy, unstable and insecure jobs with 18th century labour practices (and the associated unrest that we have seen as workers kick against the traces is a clear manifestation of this) and this low quality low paid work is another reason for poor wage growth

I agree that the EU is a disaster waiting to happen, or rather to become manifest) but economics is now a global system, no single country will survive a major depressionary recession.  I feel that Gold and Silver will switch from reacting to USD value, as it seems to be right now, to a safe haven when stocks and bonds turn bearish.  Cryptos matter not in this context, except perhaps as a storm warning as over exuberance of pie in the sky ideas crashes down to earth.

Trading approach:

All of the above is Funadamentals backdrop for a big picture analytical assessment of a massive Gold/Silver rally to come and we have to trade the market price action.  If I see price move in the manner I have laid out I will be seeking to go Long at key trigger points on both Gold and Silver.

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I'm not sure with gold these days. It seems to be very range bound for months and months, as below. Seem to be a little towards a mid range so no real conviction bid or offer.

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That's true @cryptotrader, it has to break out of this consolidation zone before a new long term trend is established.  However if you believe as I do that the next long term trend will be a rally then you want to get some markers in early (this is my methodology) so going long at or near the bottom of the range is the thing to do, on price action signals.  Interestingly the HedgeEye people (video I posted yesterday) think the bottom of the range is around 1190 from memory.  I have been working off a long term supporting trend-line that is currently around that level.  This trend-line is effectively forming a Large scale Triangle form for the consolidation with a potential Head & Shoulders neckline being the top.  A breakout from this is a critical signal.

Trading strategy:

  • Go long on a suitable retrace turn (price action confirmed), maybe a retest of the 1 hour chart previous channel breakout rally (circa 1,200)
  • Go long on a retest and bounce off the LT supporting trend-line (circa 1,190)
  • Go Long on a break through near term resistance on the Daily Chart (circa 1,245)

Ideally we should also see coincidental Stocks turn and fall but this may come a bit later as we could also get my long awaited USD retrace bearish move that would give Gold/Silver an initial kick-start before the mayhem begins.

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While I remain steadfastly bullish on Gold while it remains above the LT supporting Trend-line I can't help feeling we will see a retest of the recent breakout zone around the 1,200 level.  I think we are seeing a volatile A-B-C retrace playing out.  On the 1 hour chart I have marked the A-B just in and now project a fast 1-5 wave C down to the Fib 76/78% level and retest of that breakout zone.  There is NMD to support this turn and USD seems to be going into a relief rally.  Gold and Silver appear to remain locked to the USD at present.

XAUUSD-1-hour_291118.thumb.png.0a50031c8a3c9f2c5d66235c6dd8d3ed.png

 

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