Commodities/Forex

Andy Hecht

Top 3 Ranking in Commodities, Metals & FX --SeekingAlpha

Bullish Bonanza In Precious Metals

  • Gold rises to over $1500 for the first time since 2013
  • Silver moves through $17 per ounce
  • Even platinum moves to the upside
  • The dollar is still strong
  • The chances of a pullback rise, but the trend is your friend

The prices of gold and silver began to move higher in April and May of this year. However, the bull market in the two precious metals started back in the early years of this century. The two precious metals reached highs in 1980 and again in 2011. After over seven years of price consolidation, gold took off to the upside in the aftermath of the June FOMC meeting in the US. As the Federal Reserve guided that short-term rates would head lower, gold broke out of its $331.30 price range on the upside, surpassing the 2016 peak at $1377.50 per ounce. While silver also moved to the upside, it lagged the yellow metal.

Over the past week, both metals rallied to higher highs as the buying continues to usher in a new era of luster for gold and silver. Gold is trading at its highest price since 2013, while silver moved to a new high for 2019 and has lots of work to do to catch up with the yellow metal.

Gold rises to over $1500 for the first time since 2013

Gold is the leader of the precious metals these days. The obscure palladium and rhodium markets had been rallying since early 2016. Palladium moved from $451.50 at the lows in January 2016 through the 2001 high at $1090 in 2018 and to its most recent high at just over $1600 per ounce. Palladium was at the $1420 level last Friday. Meanwhile, the price of rhodium, a precious metal that does not even trade on a futures exchange rallied from under $600 per ounce in early 2016 to the $3540 level as of last Friday. The upward trajectory of the two metals had been explosive.

In June, palladium and rhodium handed the bullish baton to the gold market as it broke through its critical level of technical resistance at $1377.50.

Source: CQG

The monthly chart highlights that gold has moved to its most recent peak at $1509.90 last week and was just below at the $1497.50 level as of the close of business on August 9. The trend remains higher based on both price momentum and relative strength metrics. Open interest moved to the upside with the price of gold. When the total number of open long and short positions in the futures market increases with the price, it tends to be a technical validation of a bullish trend. At 11.30%, monthly historical volatility is at a level that reflects the slow and steady climb of the price of the yellow metal. There have been no significant price spikes to the upside in the gold market, which bodes well for a continuation of the current trend. The lack of any blow-off high is a positive sign for the gold market.

On the fundamental front, central banks continue to add to gold reserves as the official sector is a net buyer of the precious metal. Moreover, the current state of the world supports gold as a safe haven. The trade and currency war between the US and China are bullish for the gold market. Protests in Hong Kong that threaten peace in the territory is supportive. At the same time, Iran, North Korea, Brexit, and many other factors facing the world are all reasons that the price of gold is likely to continue to climb. Gold is the leader of the precious metals pack, and now that it broke to the upside, the technical picture favors even higher prices.

Perhaps the most bullish sign has been the devaluation of all world currencies against the price of the yellow metal. Since the early 2000s, gold has rallied in all world foreign exchange instruments. The fiat currencies that derive value from the full faith and credit of the governments that print banknotes and mint coins are falling against gold. Accommodative central bank monetary policies create a flood of currency in the global financial system. The price for the lowest interest rates in history and quantitative easing programs appears to be a rise in the value of gold. A true bull market in the precious metal is one where it appreciates around the world in all foreign exchange instruments. In August 2019, gold is in a widespread bull market.

Silver moves through $17 per ounce

Silver has lagged the price action in the gold market. While gold as $120 above its 2016 high last Friday, silver remained well below its peak from that year at $21.095 per ounce. Silver is a far more volatile metal than gold, which could mean that fireworks on the upside are on the horizon for the silver futures market. Last week, the price moved to a new peak for this year at above the $17 per ounce level, and it possible that the price has lots more room on the upside and the rally has just begun.

Source: CQG

As the monthly chart illustrates, the price of silver has been moving higher over the past three months. Open interest is at a record high level, which supports the bullish trend. Price momentum and relative strength are rising, and historical volatility at 15.76% is not at an elevated level. The critical level of technical resistance is at the 2016 peak at just over $21 per ounce, but the move to the downside since then created minor resistance at $17.36, $17.705, $18.16, $18.655, and $20 per ounce. If gold keeps on making higher highs, it is possible that the silver market could blow through those levels like a hot knife through butter.

The long-term average of the silver-gold ratio is around the 55:1 level. At $1500 per ounce, a move back to the historical average that has been in place since the 1970s would put the price of silver at over $27 per ounce.

We have all read a lot about price manipulation in the silver market. Some participants believe that financial institutions, including JP Morgan, HSBC, and others conspire to depress the price of silver. I have been trading in the silver market for the past four decades. I ran one of the largest silver trading books in history. I can state with absolute certainty that there is no grand plan to hold the silver price down. While spoofing and short-term manipulation occur in all markets, including silver from time to time, conspiracy theorists are selling nothing more than a fantasy with their claims. Silver will move to the upside when the metal is ready, and that will occur when sentiment pushes the price higher.

Even platinum moves to the upside

Platinum has been the dog of the precious metals sector as it has underperformed gold, palladium, and rhodium over the recent months and years. However, even platinum has been displaying signs of bullish life over the past weeks.

Source: CQG

The quarterly chart of NYMEX platinum futures shows that the rarest of the precious metals that trade on the futures exchanges have moved higher since the low in July 2018 at $755.90 per ounce. Platinum was at around the $864 level on August 9. However, the price momentum indicator has crossed higher in oversold territory. Platinum could offer the most compelling value proposition in the precious metals market these days. Given its depressed price and the bullish price action in all of the other members of the sector, platinum has the potential to attract investor buying that would launch the price of the metal. The platinum market is far less liquid than gold and silver, and a sudden influx of buyers could change the tone of the market in a heartbeat.

The dollar is still strong

Historically, the precious metals sector has had an inverse price relationship with the US dollar. The greenback is the reserve currency of the world. Since central banks hold both gold and dollars as foreign currency reserves, the yellow metal competes with the US foreign exchange instrument.

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Source: CQG

The weekly chart of the dollar index shows that the index has made a series of higher lows and higher highs since February 2018 when it found a bottom at 88.15. The index rose to its most recent peak at 98.70 following the 25-basis point rate cut at the July FOMC meeting.

Perhaps the most bullish sign for gold and other precious metals is that they have appreciated in the face of a rising dollar. Since the metals have increased in value in dollar terms, the gains in other currencies that have moved to the downside against the dollar are even more dramatic.

The dollar has divorced from the relationship that many market participants follow when it comes to gold and the other metals. The bottom line is that sentiment in markets has shifted. Gold has been the beneficiary, which increases the odds of gains in the other precious metals over the coming weeks, months, and perhaps years. The next leg in the gold bull market is underway, and silver and platinum could be set to ride the yellow metal’s coattails.

The chances of a pullback rise, but the trend is your friend

The higher the price of gold and the other metals rise, the odds of significant price corrections will grow. Markets rarely move in a straight line. Since gold is now $120 above its critical technical support level, we could experience a sudden downdraft that will shake the weaker holders of the metal from long positions. However, the current environment when it comes to technical and fundamental factors are telling us that purchasing gold and the other metals on price weakness is likely to be the optimal strategy over the coming weeks and months.

There is an old saying in markets that the trend is your friend. In gold, the trend is higher, and silver and platinum are showing signs that they will follow the leader of the pack. I believe the bullish bonanza in the precious metals sector is just beginning, and I will be a buyer on any price weakness.

Taking profits is never a mistake in any market, and the recent price action in gold and silver has created the opportunity to ring the register on long positions. However, I will maintain a long core position in both metals. Given the price level of platinum, I would not sell a single ounce until the price experiences a significant recovery.

Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.
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