Market Report: Finding support

Oct 21, 2016·Alasdair Macleod

MR Oct 21 1
After the sell-off of recent weeks, gold and silver found support at $1250 and $17.40 respectively.

In early European trade this morning, gold traded at $1263, up $7 since last Friday’s close, and silver at $17.47, unchanged.

This is small bear, and not much evidence of better conditions. However, with predominantly bearish commentators, excepting of course the gold bugs who are always bullish, it ranks as a credible performance. Furthermore, open interest on Comex has fallen substantially from the peak on July 11, leaving the market moderately oversold. This commentator is also convinced that some portfolio exposure, as opposed to purely speculative trading, is being maintained in rolling futures positions, so we have probably seen most of the contraction of open interest.

Supporting the bullish case is seasonal demand from India, ahead of the wedding season and Diwali. For the first time in months, local gold prices have reverted to a small premium over international quotes, indicating a turnaround in buying activity.

The next chart shows how gold has found support in the region of its 200-day moving average.

MR Oct 21 2

There is nothing precise about moving averages as support areas. They are only valuable as indications of where technical analysts set their targets. And if gold rallies from here, traders will take the view the market has found support and the consolidation appears to be over. Alternatively, if gold fall back below $1250, technical selling could drive it down to the $1200 level of last June.

Our first chart shows how silver first underperformed this year, then caught up, and has fallen more rapidly than its volatility against gold would normally suggest. As a rule of thumb, we can expect silver to be nearly twice as volatile as gold (I have a figure of about 1.8 times in mind), so on the next bull run, silver’s performance should be stellar. The gold/silver ratio is our last chart.

MR Oct 21 3

The gold/silver ratio has returned to test the 72 level, where in the past bears of silver looked to sell silver and buy gold. Since then the mood has changed, so these same traders are likely to use this level as an opportunity to sell gold and go long of silver, with the ratio targeting the 65 level. It represents an interesting trade.

In monetary news, the ECB held interest rates unchanged yesterday, and in the follow-up press conference, Mario Draghi basically said there was going to be no change in monetary policy until December. He made play of a new analysis to be produced by the bank’s staff, but it seems more likely things are on hold until the US presidential election is out of the way. Underlying Draghi’s press statement was a concern that risks are skewed to the downside, mentioned three times. This is interesting, because it accords with a general feeling in financial circles that monetary policy everywhere has failed. In turn, it sets traders up for the possibility that markets are vulnerable to a general failure, because the central banks’ put is in question.

Therefore, if there is a sharp fall in asset markets, which would be headlined by equities sliding, the first response from precious metals could be to fall in the face of indiscriminate selling. It is events of this sort that produce the best buying opportunities.

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