Precious metals surge

April 22, 2016

Precious metals are surging across the board, with silver and now platinum looking particularly bullish. As we reported on Tuesday, the pressure has been building for precious metals like silver to explode higher in recent months. The significantly weaker dollar has helped to underpin several buck-denominated commodities of late. The US currency has depreciated because of receding expectations about the pace of interest rate rises. According to the Fed Fund Futures, the likelihood of a rate hike by December is now only 50 per cent. Other major central banks have also either turned more dovish or maintained their extremely loose policy stances. The ECB is likely to echo this sentiment today, while the Swedish central bank has already decided to expand its QE package this morning.

So, the extremely loose central bank policy across the globe has boosted the appeal of precious metals since they are all non-interest-bearing assets. On top of this, the rallying price of oil has increased the likelihood that global inflation will overshoot expectations which further increases demand for precious metals. Gold has historically been used, among other things, to hedge against rising price levels. Finally, Chinese demand fears have receded in recent times owing to an improvement in data there. This has been especially helpful for silver, which, as well as being a precious mental, has many industrial uses, too.

Indeed, silver has outperformed gold and the gold-silver ratio has turned decisively lower. The relatively lower prices of silver compared to gold probably appeal to some long-term investors who reckon that the downside is now limited for the grey metal (i.e. not that it will ever fall to zero but it is a lot closer to this level than gold, psychologically making it a safer choice for most). This has been reflected in speculative interest in silver which has been growing rapidly in recent times: there have been strong inflows into silver-backed ETFs while net long positions in silver were increased to a record high level last week according to the latest positioning data from the CFTC.

Unambiguously, the weekly chart of gold-silver ratio shows a clear breakdown of a long-term bullish trend line which favours more outperformance for silver going forward. Meanwhile, silver’s daily chart shows the metal has broken out of a major resistance zone circa $16.15-$16.30 this week and it has now surpassed a Fibonacci zone around $17.00. As things stand, the bulls appear to be aiming for the next Fibonacci targets at $18.00 and $18.30, and possibly the prior reference points at $18.50 and $19.00. The key support for silver is at $17.00 and then the $16.15-$16.30 range, which was previously resistance. Platinum’s weekly chart echoes the outlook on silver, showing a clear breakout above $1000. Finally, gold’s chart shows tight consolidation near the recent highs. The consolidation here has allowed the RSI momentum indicator to unwind from “overbought” level of 70 through time rather than price action. Will gold follow the other precious metals and break higher now?   

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