December 5, 2014
As posted on CQG.
Trading gold and silver has been treacherous lately. It has been a case of expect the unexpected in these two precious metals markets. Gold and silver bulls and bears are some of the most vocal and emotional traders and investors out there. Bulls make a strong case as do the bears. Perhaps that is why it is very difficult to get a handle on the direction of these two metals. Perhaps compelling cases on each side of the argument are the reasons that gold has not yet broken out one way or another.
Fundamentals Looked Weak after the Swiss No Vote
The referendum voted down in Switzerland on November 30 failed in a landslide. Seventy-eight percent of Swiss voters who went to the polls voted a resounding no on an initiative that would have required the Swiss National Bank to hold 20% of reserves in gold. A yes vote would have required the Swiss to buy around 1,500 tons of the yellow metal in the next five years as well as repatriate gold held outside of Swiss borders. The result of the referendum was a disappointment to gold bulls. Gold fell from $1,175.50 to a low of $1,141.70 in the wake of election results. Silver, gold’s little brother, fell from $15.56 to a low of $14.155 after the Swiss no vote. Gold and silver had been under pressure since early summer. A stronger dollar sent many commodity prices tumbling and precious metals were not exempt. Pressure on gold and silver Sunday night was a continuation of selling from Friday when commodity prices hit the skids after OPEC announced it was not cutting production, sending oil prices cascading lower. Friday, the day after Thanksgiving in the US, is generally a quiet day in markets. This past Friday, given OPEC’s inaction and oils’ slide, was anything but quiet – commodity prices tanked.
Sunday night, as gold and silver fell, it looked like the two precious metals were going down for the final count. Then, in a dramatic reversal of fortune, the precious metals became precious once again. An announcement that the Indian government cancelled import restrictions on gold is a likely cause for the sudden metamorphosis. The increasing number of short-sellers ran for cover.
Technical Bullish-Key Reversal
Gold and silver rallied but it was no usual rally. Gold traded up to a high of $1221 on Monday, $79.30 and almost 7% above the lows of the day. Silver exploded to $16.81 – a rise of $2.655 or 18.76% above the lows of the trading session. Both gold and silver put in bullish key-reversal patterns on the daily chart. Each market made a new low (below the previous trading session low) and closed above the highs of the previous trading session. This is nothing new for gold and silver. Both metals have been putting in bullish key-reversal patterns on daily charts in November. It happened on Friday, November 7, and again on Friday, November 14. The key reversal on December 1 was different in that both markets exhibited huge volatility spikes and very large volume.
Weekly Charts May Hold the Key
Recent increasing volatility in gold and silver has not yet resulted in a technical breakout. However, there are signs that it might only be a matter of time until these metals finally make a move. While strength in the dollar continues and the greenback is bumping up against long-term resistance levels, gold and silver are showing signs of life, which is historically counter-intuitive. There is generally a strong inverse correlation between the strength of the US dollar and all commodity prices, including precious metals. Despite the historical relationship, weekly charts in gold and silver could be signaling otherwise.
Gold is setting up for a bullish key-reversal trading pattern on the weekly chart. All gold needs to do is close above $1203.80 on Friday, December 5.
Silver is also setting up for this bullish pattern on the weekly charts. A close above $16.69 would indicate a bullish key reversal in silver.
The Bottom Line
Watch the action in gold and silver for the rest of this week. A close above $1203.80 on February gold futures and above $16.69 on March silver futures will mean that both have reversed and could be shrugging off the bearish price action of recent months. This could make the rest of 2014 very interesting in the world of precious metals. If both metals are unable to close the week on these high notes, it is highly probable that action in gold and silver will be less than exciting as the year draws to a close.
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