Commodity Trade Mantra

Is Gold and Silver Bull Market Intact or will US Dollar Strength Crush it?

Is Gold and Silver Bull Market Intact or will US Dollar Strength Crush it?

Is Gold and Silver Bull Market Intact or will US Dollar Strength Crush it?

As we await the end of this silver correction, it is appropriate to stand back and look at the bigger picture. To that end, take a look at this chart which shows silver’s Bollinger bands, but in particular the midline which is also the 20 month moving average. – Roland Watson

Silver Bull Market Still in Force

http://goldseek.com/news/2016/10-20rw/1.jpg

Going way back to November 1998 after the Warren Buffett spike, the OHLC bar range of silver dropped below this moving average. With that silver re-entered its long term bear market and what one would have been looking for with this indicator was for the silver’s OHLC range to complete one full month above and clear of the 20 month moving average.

This did not happen until May 2002 when silver’s low range for the month was a mere one cent above the moving average and silver closed the month at $5.02. This signaled the beginning of a silver bull market and the metal was to trade above this moving average until September 2008 when the OHLC range of silver traded fully below the moving average. That meant this moving average kept you right on silver for six years and four months.

Having said that, I regard this setup as more of a buy signal as the collapse below the moving average can be quite dramatic and swallow a lot of your profits. I prefer to use more targeted indicators to identify the sell points.

But getting back to this moving average, as the Credit Crunch of 2009 progressed, one would again patiently wait until monthly silver fully traded above the average. That signal came one year later on September 2009 when silver closed out at $16.62. The end came in May 2012 when the opposite happened and silver fully traded below the moving average and closed out at $27.69. That adds up to a two year and eight month bull run.

Now we come to the present day and having spent exactly four years under the moving average, silver broke clear this May with monthly silver closing at $15.99. Based on our prior examples, this suggests silver has now entered a new multi-year bull market.

Will a Rising US Dollar Crush Gold’s Fledgling Bull?

Gold and gold stocks have stabilized after forming a short-term low and even held up well while the US$ index pushed to an 8-month high. Conventional wisdom would tell us with the US$ index nearing a major breakout, Gold and gold stocks would be vulnerable to further losses. However, many astute analysts and traders believe that Gold and the US$ index can rise together and we note that the trend in the US$ index while important, is not the primary driver of Gold. Ultimately, as long as Gold’s fundamental driver, declining or negative real rates remain in place, then the fledgling bull market will remain on track. – Jordan Roy-Byrne

First, take a look at what I like to call my master chart for Gold’s fundamentals. We plot Gold, the real fed funds rate and the real 5-year yield. We highlight the major bear markets in Gold which occurred when real rates were rising or were strongly positive. Since the middle of 2015 real rates have declined and that explains the sustained recovery in Gold this year.

oct212016goldfundamentals

Although the Federal Reserve could raise rates, inflation is ticking higher and recent market action argues that inflation and inflation expectations will rise into 2017. Inflation metrics such as the sticky CPI and core CPI are showing inflation well above 2% without higher energy prices which could be on the way in the months ahead. Oil closed the week at a 15-month high and in recent weeks surged above important moving averages such as the 200 and 400-day.

In other words, the potential coming rise in inflation figures to dwarf a measly quarter point rate hike. Recall the mid 2000s and the 1970s. Inflation rose faster than interest rates and so Gold performed well. The Fed raises rates when inflation rises but the Fed is almost certain to remain behind the curve and let inflation run. That is bullish for Gold in US$ terms, even if the US$ index is performing well.

Another thing to keep an eye on is Gold’s performance against foreign currencies. Below we plot Gold priced in a number of different currencies and the corresponding 400-day moving average. Other than in Yen terms, Gold is in an uptrend against every major currency and remains above rising 400-day moving averages.

oct212016goldfc

Ultimately, the single most important driver of Gold is negative or declining real interest rates and with inflation poised to rise, real rates are likely to decline further in 2017. If the US$ index is rising then that certainly puts some cap on Gold’s performance in US$ terms. However, the presence of negative real rates combined with continued outperformance in foreign currency terms would sustain the bull market. Moreover, precious metals already experienced a vicious multi-year bear market. You don’t get that kind of buying opportunity twice but the recent correction in the sector has created a lower risk buying opportunity.

 

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