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By: Rhona O'Connell, Head of Market Analysis
Increasing signs of life in silver bode well for gold
We noted last week that gold was coming close to completing a triangle formation, which would point to a break-out. That happened last Thursday 21st October, with gold breaking higher and running up towards $1,820 before correcting. The uptrend line that formed part of the apex of that triangle should now provide support. The narrowing of the triangle formation means that the moving averages on the 30-minute chart shown below are closely coupled, so the 10D moving average was sitting at precisely $1,800, with the 20D at $1,798 and the 50D at $1,797. Below that we find the 200D at $1,783. This looked as if it was going to provide good support, but the move Has again been foiled with a strengthening dollar, but we continue to believe that the tailwinds outmatch the headwinds for gold and, by extension, silver.
There was no specific news item that caused the initial breach; the subsequent move higher was obviously technically driven to an extent and the majority of the press headlines are still referring to inflationary fears and the persistence of the virus. Fed Chairman Jay Powell was talking down inflationary threats at the end of last week and holding to his transitory opinion although he did concede that supply-chain risks could keep inflation higher in 2022 than previously expected. The tapering programme is still expected to be complete by mid-2022, but the parameters are different with respect to interest rates and hikes are not really expected until late 2022 or beyond. That said the gold price continue to trade closely with the U.S. ten-year yield and the correlation between the two is currently comparatively high at minus 0.55; see the chart below.
Silver joined in the move, for the first time in a while, which also points to increasingly positive sentiment towards the two metals as a whole. Frequently when gold is not very active, silver will drift lower, and the ratio widens; if when gold moves silver doesn’t go with it then gold’s move can be a false one; and equally when silver does respond then the overall tone is more unified. In this instance gold’s short-lived rally was a price gain of 2.1%; over the same timescale silver’s move was 3.3%, a beta of 1.6. This is not as much as it would normally be – the beta in a confirmed move is normally closer to two, or sometimes more; but it does show a degree of rekindled interest – which also undermines gold’s attempt to break higher although it does indicate a further build-up in pressure.
As far as the futures markets’ managed money positions are concerned, action in silver in the week to 19th October (when prices gained 5% on the week to $23.67), saw the addition of 417t of fresh longs, btu a hefty 1,833t of short covering, taking the net long to 3,285t, the highest since the start of August. Gold, meanwhile, rallied in the first part of that week but gave back almost all the gains and positions were reduced on both sides of the market, leaving the net long down by just 2t to 180t.
So we can see that interest in silver is building in the professional market. Of particular interest here also is that coin demand is proving to be extremely strong and is only being constrained by the difficulty in getting hold of supplies. The major mints are on allocation and small bar demand is also very strong.
So with silver back in the party (the ratio is down to between 73 and 74 as we write) the outlook for gold is enhanced as this reflects more positive sentiment, both at the professional and at the retail level.
Gold and the U.S. ten-year yield
Source: Bloomberg, StoneX
Gold; triangle formation complete; breakout ensued
Source: Bloomberg, StoneX
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