The Technicals: Gold Bull Market Still Looks Very Strong
This analysis attempts to look at different metrics to understand the current momentum in the gold and silver markets. It is meant as an analysis on potential price direction in the very short-term (a few weeks to 1-2 months).
The last technical analysis in March highlighted that the gold market did not look frothy despite big price jumps higher. That conclusion proved accurate as the price has held up well and even risen since that analysis.
In this latest analysis, the market actually looks healthier than it did in March with plenty of indicators showing there is support for continued growth.
Price Action
Gold and silver continue to climb higher and higher in a very stealthy bull market. Very little attention has been paid to the massive price increase over the last few years. There was a recent article that highlighted how gold has crushed the stock market when looking back over 25 years.
Still, even with the price moving ever higher, the action does not look unhealthy. The last two months have seen consolidation in gold while silver has finally caught up.
Outlook: Bullish
Figure: 1 Gold and Silver Price Action
Daily Moving Averages (DMA)
Gold
The 50 DMA has been above the 200 day for over a year now. This confirms the bullish trend is intact. The price had pulled away from the 50 DMA which led to some consolidation in the short-term but overall, the market looks strong.
Outlook: Bullish
Figure: 2 Gold 50/200 DMA
Silver
Silver had been trending in a similar way, but recently shot up big time and may need a bit of time to cool off. Then again, it had some serious catching up to do… but more on that later. Until then:
Outlook: Neutral
Figure: 3 Silver 50/200 DMA
Comex Open Interest
Gold
The price has been propelled higher despite open interest plummeting to multi-year lows. This chart looks incredibly bullish! The fast money is not all-in on gold, that money is leaving the market. This usually causes the price to drop and yet the price keeps moving higher.
Outlook: VERY Bullish
Figure: 4 Gold Price vs Open Interest
Silver
Silver open interest is slightly more in line with what you would expect, bursting higher and driving the price. This could easily happen in gold. As for silver though, this was a big surge and could reverse. Caution is warranted.
Outlook: Slightly Bearish
Figure: 5 Silver Price vs Open Interest
ETF Shares Outstanding
GLD and SLV are the two most popular ETFs that track Gold and Silver. While institutions will buy these funds, this data generally shows retail interest. The chart shows the price and shares outstanding. Shares outstanding is the metric that shows overall retail interest.
Gold
Retail is still sitting on the sidelines during this bull market. They have been net sellers of GLD since gold hit $2000 during covid. This indicates smart money has been buying. Retail will jump in eventually, but that is usually a sign the market is getting frothy. We are far from that point with only a slight uptick recently.
Outlook: Bullish
Figure: 6 ETF Analysis
Silver
SLV has seen a little bit of a pop as the recent price spike happened, but it is still well below recent highs.
Outlook: Bullish
Figure: 7 ETF Analysis
Margin Rates and Open Interest
The CME uses margin requirements to pull momentum out of the futures market. This is usually done to halt explosive up moves and contain them, but can be used in quick bear markets as both shorts and long are subject to margin requirements. Margin increases force traders to put up more capital or sell off contracts to meet requirements. Managed Money (see CoTs report) are more sensitive to margin increases as they tend to be more levered and capital constrained, so margin increases typically force them to liquidate positions (if they are long prices go down as they sell and if short prices go up). More often, traders are long and higher margin causes forced selling.
Gold
Margin rates have been pushed to their highest level on recent record. The CME does not have much room to raise margin requirements much higher. Furthermore, the increases have done very little to restrain the current move. It has reduced open interest, but not the price.
Outlook: Bullish
Figure: 8 Gold Margin Dollar Rate
Silver
The last Margin increase came in April which was a big move up. Open interest jumped anyway, driving the price higher.
Outlook: Bullish
Figure: 9 Silver Margin Dollar Rate
Gold Miners
For short-term moves, the gold miners have been consistently leading the price of gold in both directions for years (i.e., if GDX starts selling off it usually indicates gold will come under pressure). The GDX got slammed in the pullback from the election and gold followed suit. Despite this relationship, the miners have a harder time recovering from big sell-offs. It leads in direction, but not in magnitude. For example, while gold has shot past all-time highs, GDX has only just reached the October levels.
Right now, GDX has been strong indicating that there seems to be momentum behind the gold market. It has risen quite a bit since the start of the year relative to gold.
Outlook: Bullish
Figure: 10 Arca Gold Miners to Gold Current Trend
The chart below shows the longer-term historical relationship. The miners have been absolutely punished over the last decade as stock traders have never bought into the current move in gold. That leaves these stocks deeply undervalued and set up for an explosive move when the stock traders accept the big move up in gold is not a quick head fake.
Figure: 11 Arca Gold Miners to Gold Historical Trend
Trade Volume
The final indicator is trade volume on the CME. This is related to, but not exactly tied to open interest. Higher trade volume with flat open interest can mean churn. Higher trade volume can also be met with increases or decreases in open interest if buyers or sellers are in control.
In gold, the new high prices have NOT been driven by elevated volume. It’s quite shocking to see how normal the market looks as the price has exploded higher this year.
Outlook: Bullish
Figure: 12 Gold Volume and Open Interest
Silver is in the same boat, reaching new highs with average volume.
Outlook: Bullish
Figure: 13 Silver Volume and Open Interest
Conclusion
Gold has been on fire recently. New high is followed by a new high seemingly every month. As we stand today, the only concern in all this data is that all indicators are overwhelmingly bullish. Usually, the data shows a mixed bag. Instead:
- Price action looks stable
- Moving averages are confirming a bullish posture
- Open Interest is well below average
- Retail is not participating
- Margin Rate increases have not slowed the price advance
- Trade Volume is not elevated or below average
- The gold miners are finally showing strength
Silver has had a move recently, but it had a ton of catching up to do with gold since it had mostly stayed in a range while gold broke to new all-time highs.
