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Metals Mayhem: next trade setup

Commentaries & Views

What a volatile week in the metal’s markets! Their moves we saw last Tuesday (5.7% decline in gold and 15% decline in silver) reminds us of that old saying "markets often fall twice as fast as they rise!" Many of you will immediately say that it was "manipulation." Well, not exactly, after all, our initial year-end $30/oz price objective hit months earlier than expected, so why not take something off the table? Similarly, many other major financial institutions issued a recommendation of closing out their silver trades while reaffirming that we are still in a secular structural precious metals bull market. 

Over the past couple of decades, I have learned that many of you will be permanent bulls of the metal’s markets, and there is nothing wrong with that. Others will take a more tactical approach working off cycles and risk ranges. The current structural bull market is well intact, with Central Bank actions being supportive by attempting to overstimulate the economy, the Gov't record debt levels, inflation expectations growing, and a weakening dollar that all lays out a bull market the sine curve. If you are not familiar with the sine curve, it is a mathematical curve that describes a smooth periodic oscillation, and back in the Autumn of 2018, gold was at the bottom of the sine curve at $1150/oz and GDP was at the top of the cycle at 4.2%. 

If you get our Blue Line Morning Express report, we put out a note this morning. "Fundamentals: Gold extended its bounce back yesterday, after all, the metal is in a historic uptrend. However, is the time right here, right now, for the metal to begin its next leg? The short answer is, not yet. We believe the next leg can go to a minimum of $2300. The most significant headwind may be a strengthening U.S. Dollar as it battles at two-year lows. According to our proprietary research, there have been 7 instances since 2006, where gold lost 5% or more in one day. Over the next two weeks, it has averaged a loss of 2.9%.

Technicals: Where it's easy to get excited about the bounce back and the broader bullish run, it is crucial not to forget that strong resistance at 1955.2-1957.7 has been sticky and is proving so this morning. Our momentum indicator also aligns with this pocket, and support does come in lower from 1940-1942. Still, it is important to understand the damage created amid Tuesday's collapse and the probability of retesting those lows. For that reason, if someone were looking to position in gold for the long run, we suggest that our clients consider using the FOUR Micro 10 oz December Gold contracts per $25,000 and buying TWO at 1910 and TWO at 1855, with a stop at 1790. Doing such would ideally risk $3,700. We would look to a target of 2275, which would allow for a profit of $15,700. If you would like to be up to date on the developments and strategies we are deploying, please register for a Free two-week trial by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up

Daily December Gold Chart

Next week will be another week with few data releases, and the minutes from the latest FOMC meeting. We want to continue to monitor Treasury yields and look for any signs that they are willing to expand Treasury purchases. The volatility around this release could be the catalyst we need to fill our gold strategy while setting the stage for another bull run.

If you did not receive the new edition of our free "Gold Trends Macro Book," it has been updated with silver slides. This monthly updated booklet will provide you with all the quantitative analysis of the precious metal’s markets. You can request yours here: Free Gold Trends Macro Book.

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.