Last month I was wondering “Is It A Trap?” for the top precious metals, referring to the short term bounce that we have been observing.
Bears have smashed the silver price badly below the former valley. Hence, I would start the update with its monthly chart below.
Silver futures topped around the $21 mark the same day the previous update was posted in the middle of August and then it dropped like a rock to the downside.
The price already drills down the largest Volume Profile (orange) support as it entered the $16-$18 range. The peak volume was registered at the $17 level in the monthly chart. Below $16 the support weakens and further down below $14 there is a volume support gap.
I built the black downtrend with a red mid-channel in this big chart above. We could visually distinguish the first drop (large left red down arrow) from 2011 to 2015. The following huge corrective structure emerged during 2015-2021. Now the market could build the second leg down. The mid-channel support is located at $13.5, right below the above mentioned lower volume area.
We can mark the lower supports for the future. The Flash-Crash valley is at $11.6 fortified with the all-in sustaining costs located at $10.9. The valley of the distant 1991 at $3.5 is the next possible support.
Bulls should push the price outside of the downtrend beyond $27 to turn the tables.
Before we get down to the gold futures chart, I would like to update the U.S. 10-year Treasury yield (10Y) chart posted last March in the “Wake-Up Call For Gold” post. That post was prophetic for several markets as thoughts shared then start to play out now.
The 10Y impacts the gold price strongly as we saw earlier, therefore it is crucial to demonstrate the big picture.
The 10Y had been moving down within a huge red downtrend since 1994. There were two false breaks: the minor breakout in 2007 and the larger one in 2018. The mid-channel (red dashed) started to act as a strong support in 2015 as the yield never crossed it down since then. The last episode was in 2020 when this support rejected the huge drop and the price reversed to the upside.
The 10Y eyes to surpass the current resistance based on the former top of 3.25%. There was a puncture of this level earlier this summer, however the price dipped back down below and it fueled the recent short term bounce of the gold price.
The next barrier is at 5.32% or over 200 basis points higher. The Fed is still under pressure over inflation. Last week, Cleveland Federal Reserve Bank President Loretta Mester (FOMC member) said: "My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year." In this context, the next hurdle for 10Y above 5% looks achievable.
The more efficient the fight with inflation the worse it is for precious metals acting as an inflation hedge.
The gold futures chart is the next.
There are three things in the chart that instantly catch the eye. The 10Y (gray) and the gold futures price move in sync in the opposite direction – as soon as yield reversed up the gold dropped. The second thing is the accurate price action on the 52-week simple moving average (purple) – the growth of the price has stalled right there. And the last observation is the Volume Profile (orange) – the price couldn’t overcome the large volume area.
The gold futures price has dropped deeply, but is still above the black trendline support and the former valley of $1,678. The momentum of the truth is very close both for gold and for 10Y as they approach the barriers simultaneously.
The price is already in the volume gap area as no significant levels are seen until the nearest support of $1,500. Earlier, your largest bet was that $1,500 will hold. Another $200 down and the price will reach the large volume area at $1,300. The die-hard support is located in the valley of 2015 at $1,045 where the possible large sideways consolidation could be completed.
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.