Silver lining for precious metals?

2 December, 2016

I do apologise in advance for bombarding you with lots of commodity reports, but ahead of Friday’s NFP report, the FX markets tend to create lots of false moves, so it is difficult to make much of today’s moves. You could argue that it is the same for dollar-denominated commodities like gold and silver. Well that’s partly what I am trying to get at. Both precious metals have broken below their respective 61.8% Fibonacci retracement levels against their December 2015 lows, but these breaks could turn out to be false moves. There is a possibility that both gold and silver are about to turn higher, possibly once the US jobs report is out of the way tomorrow, or maybe even later on today. A small possibility, but a possibility nonetheless. Let me explain.  

Last December, gold bottomed out on the third of the month, which was a Thursday, the day before that month’s NFP data. It is early December again, and history can repeat itself. Now I am not entirely convinced yet, as so far there is not much bullishness to talk about on gold and silver, with yields rising, dollar remaining bid and equity markets being near their record highs in the US. However, it is when sentiment is at rock bottom, like now, that the markets tend to turn around.

Precious metals can go up along with the dollar and amid rising yields. Historically, a rising dollar means we are heading into a “risk-off” environment. And today we may have seen the first glimpse of what might be upon us. After struggling to keep up with Wall Street throughout the Trump-inspired rally, European stocks tumbled. This time the jitters were evidenced on Wall Street too, unless you were just glued in front of the Dow chart, which barely moved thanks to its large oil constituents. The S&P and Nasdaq on the other hand, fell sharply. So, it could be the start of “risk-off” trading, which could very well last several days or weeks. As a result, the perceived safe-haven assets like gold and silver might find some much-needed support.

It is also worth considering the fact that gold and silver tend to perform well during inflationary periods. With Brent oil surging higher to new 2016 highs today and president-elect Donald Trump about to splash the cash in the US, inflation could rise sharply. As a result, gold and silver may become appealing once again to those worried about the risks of inflation eroding the value of their assets. Added to this, higher-yielding equity markets may be near the top due, among other reasons, to the rising government bond yields and the withdrawal of central bank support with the Fed tightening its belt and ECB potentially tapering its QE programme soon.

Added to all the above fundamental reasons, there are also technical reasons why precious metals may be about to turn higher. Last December’s impulsive rally after several years of downward trend suggests that gold and silver both probably bottomed out. If that is correct, the selling we have witnessed since the peak of the summer may have been a corrective rather than impulsive move. And if that is correct then gold and silver should bottom our after staging deep retracements. Now both metals have pulled back to their respective 61.8% Fibonacci levels, which is not exactly shallow. So far however we haven’t seen any eye-catching impulsive moves to make us turn bullish, but that could happen in the coming days. Watch out for that possibility.

As a side note, I have always been more bullish silver than gold “in the long-term”, because of the former’s dual usages as an industrial material as well as a precious metal. At $16.50 per troy ounce, silver has a lot less ground to fall than gold. The grey metal could turn positive soon, but rather than predicting where the bottom may be, try instead to anticipate it, especially around these technically-important levels. Put another way, wait for silver to show a good technical reversal sign before potentially considering going long, say on a pullback or a breakout. As always, don’t forget your risk and money management duties, and be aware that no one knows what will happen next. No one. Indeed, who is to say that the metal can’t fall further?

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