Since warning about a possible correction in gold and silver in late-January, gold has fallen by $125 and silver by $1.64. Though I am a longer-term fan of precious metals, I have been concerned in recent years about the risks posed by the ending of the commodities supercycle as well as the rising U.S. dollar, which trades inversely with precious metals and other commodities.
I intend to invest in precious metals for the longer run, but I have been waiting for the current bearish cycle to run its course before I commit. Like any investor, my goal is to get the most for my money, so I have been analyzing precious metals carefully to determine when they have finally bottomed. I believe that technical or chart analysis is very helpful for investment timing decisions like this.
In the shorter-term, gold has been falling in a channel pattern due, in large part, to the soaring U.S. dollar and the bearish influence of falling commodities prices. The yellow metal is currently sitting just above its $1,150 support level that formed in November and December 2014. If gold eventually falls decisively below both $1,150 and $1,130 (the intraday low in November), it would represent a major technical breakdown that could foreshadow a move to $1,000 per ounce (the next obvious psychological level) or even lower. On the other hand, if $1,150 proves to be a solid support, gold may attempt to rebound to the recent highs - particularly $1,300.
Looking at the longer-term chart, gold has been trading in a range between $1,200 and $1,400. The next major directional move will be signaled by a convincing break above or below one of these levels. If gold stays under $1,200 and a solid bearish follow-through occurs, $1,000 is the next price target to watch. It is worth noting that commercial futures hedgers (often considered the "smart money") have scaled back their bearish position, which may indicate that they expect a bounce in the near future.
Source: Finviz.com
Like gold, silver has been in a downtrend channel since late-January and is now sitting just above its key psychological level at $15 per ounce, which also acted as a support in November and December. If silver breaks below $15, it could continue to drop and approach the low-teens or even $10 per ounce. If $15 proves to be a solid support, however, silver may attempt to rebound toward its recent highs around $18.
The longer-term chart shows that silver is trading in a range between $15 and $19, and a break above or below these levels is necessary to signal the next important directional move. Commercial silver futures hedgers have pared back the bearish position that they built in late-January, so there is a chance that silver may experience a rebound off of $15 - even if it is a short-lived move.
The U.S. dollar's powerful bull market should be a concern for all commodities investors, even though precious metals have held up surprisingly well so far. My worry is that gold and silver will finally succumb to the dollar strength in a delayed manner if the greenback continues its current ascent. The longer-term U.S. Dollar Index chart shows how it cleared both its key psychological levels of 93 and 100, and there is very little resistance until 120 - a level last seen in early-2002.
The factors that are driving the U.S. dollar bull market are not going away any time soon, which includes the ongoing tightening of U.S. monetary policy (upcoming Fed rate hikes), loose European and Japanese monetary policies, and the rapid unraveling of the multi-trillion dollar global carry trade.
The Euro, which is positively correlated with gold and inversely correlated with the dollar, recently crashed under its 1.2000 support level and has little obvious technical support until .8500. Indeed, Deustche Bank recently warned that the euro may fall to 85 cents by the end of 2017.
For now, I believe that precious metals investors should pay close attention to the U.S. dollar rally and how gold and silver act at their key support levels of $1,150/$1,200 and $15 respectively. If the dollar continues to climb unabated and gold and silver close decisively below their support levels, then a sharp bearish move is likely. Alternatively, if the U.S. dollar takes a breather and precious metals are able to find support, a bounce is possible - even if it is short-lived.
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(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)
