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Gold and Silver 2018 Outlook - The Fundamental Technician

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Editor's Note: Colin Cieszynski, chief market strategist at The Fundamental Technician, provided exclusive commentary for Kitco News' 2018 Outlook Series.

Finding a place for metals among new currency options

(Kitco News) - Historically, gold has held a special place in the currency world; as a store of value whose level of supply is outside of the control of the world's central banks. As the world's premiere hard currency, gold has tended to trade in opposition to the world's premiere paper currency, the U.S. Dollar.

Colin Cieszynski, chief market strategist at The Fundamental Technician

Since bottoming out in late 2015, gold has been steadily recovering with some setbacks along the way. The first setback, in late 2016 coincided with the election of President Trump and the emergence of a more hawkish Federal Reserve, which boosted the value of the U.S. Dollar. With other central banks starting to normalize monetary policy, particularly in Canada and the UK, the U.S. Dollar eased back in the second half of 2017, enabling gold to resume its uptrend.

The setback of late 2017, however, has been very different with longer term implications for gold. Cryptocurrencies have been loitering around the fringes of the financial world for some time but in late 2017 exploded into the mainstream. The move toward the listing of Bitcoin Futures on the CME gave cryptocurrencies the stamp of credibility they had long been lacking.

Part of the attractiveness of cryptocurrencies is that, like precious metals, Bitcoin and Co. are not under the control of central banks and their money printing/devaluation/manipulation programs. Because of this, some traders clearly shifted money that previously would have been allocated to gold into chasing Bitcoin depressing interest in gold.

In the latter part of December, following Bitcoin's debut on the CME, some of the cryptocurrency hype has died down and capital has returned to the gold markets. One of the key drivers of trading in gold and silver in 2018 is likely to be about the relationship between precious metals and cryptocurrencies and how both groups find their place in an expanding currency trading world.

Traditional drivers of Gold trading are unlikely to go away in 2018 and may also have an impact. Rising commodity prices and the potential for the return of inflation could support Gold in its role as an inflation hedge. This may be offset, however, by central banks continuing to normalize monetary policy, whether through raising interest rates or tapering QE/money printing programs, which could boost the value of some paper currencies relative to hard assets.

Key levels for gold in the coming year on the upside include $1,300 where a breakout would complete and ascending triangle base, then the $1,375 to $1,400 zone where gold rallies have died out several times over the last four years. On the downside, $1,250 and $1,200 have emerged as significant support levels. For Silver, significant upside tests appear near $18.50 then the $20.00 around number, and then $21.50 a resistance level that has remained in place through multiple tests since 2014. Key downside support for Silver appears near $15.50 then $15.00 and $13.75.

There is a small chance of a big event that could totally rock precious metals were it to ever come about. For many years, one of the gold bugs wildest dreams has been that someone would launch a gold backed currency, and was one of the main plot drivers in Neal Stephenson's Cryptonomicon (Avon Books, 1999). Last Friday, reports started to swirl that Venezuela is considering launching a cryptocurrency backed by some of its oil reserves, which would be the first time that a cryptocurrency would be backed by a hard asset. Should reality once again follow Science Fiction and gold or silver be used to back one of the burgeoning cryptocurrencies out there, it could become a generational defining moment in precious metal markets.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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