While the markets have been very volatile lately, hence difficult to predict, it is reasonable to expect a bounce in the price of gold and silver. We hasten to say that nobody can predict the future, so our expectation could turn out to be wrong. To be more precise, the probability of higher prices is higher than the probability of lower prices, at least in the short run. Here is why.
(1) Excessive speculative shorts and growing commercial longs
In the short run, gold and silver prices are primarily dominated by the futures market (COMEX) as reported in the weekly COT reports. The futures positions of commercials are increasingly long while the speculators are historically short. The first chart below shows those positions. It appears that the short positions of small speculators (small and private investors) are as high as in the years prior to 2000 (just before the current huge bull market started). The divergence between the commercial long and speculative short positions is considerable. Ted Butler repeatedly reports the influence of commercials in driving the price, so the likeability of a rally is high. However, there is one caveat. No matter how well a contrarian position can work, the speculative short positions are so high that it could break whichever rule has worked in the past. Chart courtesy: Sentimentrader and Standard Bank Research.
We wrote in Crash Course In Short Term Gold & Silver Price Forecasting about a reliable indicator, which is the net speculative length (long minus short positions of speculators) as a percentage of total open interest. Readings below 19 in gold and 11 in silver are buy signals. The current readings are shown below. The same disclaimer as mentioned in the previous point applies here as well.
(2) Sentiment is at extreme levels
Related to the excessive short positions by speculators is their extreme pessimism. The Hulbert Gold Sentiment index is at a reading not even seen in 2008. Current readings have almost no downside; the potential to correct to the upside is higher. Chart courtesy: Sentimentrader
(3) US Dollar is running into resistance
The US Dollar is widely accepted as negatively correlated with the gold and silver price. The following chart of the US Dollar index shows that current readings are at a major resistance point. The 84 level has been tested twice since 2010, so from a chart point of view this is the third retest. The recent upside breakout has been invalidated fast. But if the dollar would confirm its break out it will be very bearish for the metals. Meantime, a short break is likely, meaning it could spur a (temporary) gold and silver rally.
(4) Stock market shows sign of a (temporary) slowdown
The stock market and precious metals are the most negatively correlated assets. No wonder that the S&P 500 and gold have been moving into the opposite direction for the last 7 months now. But the first sign of a slowdown in the equity market is a fact. Moreover, as Zerohedge points out, high yield credit markets start heading down which happened in 2007 as well, exactly one year before the biggest financial crash ever. This could point to increasing volatility. Although the rise in equities is probably not over, the short term moves in both directions are increasingly likely which should give room to a gold and silver bounce.
Also the Japanese stock market is showing more and more signs of volatility. It has the potential to profoundly impact global equity markets.
(5) Gold and silver prices have successfully retested their lows
So far the mid-April lows in the gold and silver price have hold, at least on the daily chart. Silver has breached its lows on an intraday basis, but recovered quite fast. It is too early to have a confirmation of their mid-April lows, but so far (let’s repeat that: so far) it is likely that the lows have been successfully retested.
In no way does it mean that the mid-April lows have been the final lows.
PLEASE NOTE: This article is focused on the short term. It is impossible to tell what would happen with prices on a longer term. On a very long term basis, we remain extremely bullish vis-à-vis precious metals! Long term PHYSICAL bullion holders should chose for the monetary protection of the metal(s).
DISCLAIMER: This article does not contain any sort of financial advice, but only opinions.