After silver short squeeze fails, a gold stop run succeeds
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Once the now-famous retail Reddit Army was able to push the silver price to strong resistance at $30 on Sunday evening, the CME Group raised margins on Comex silver futures by 18% after the metal surged to an eight-year high this Monday.
The margin increase effectively ended an attempt to manipulate the price of silver above strong resistance, as the metal reversed quickly during overseas trading on Monday evening. But given the extreme volatility this attempt created to openly manipulate the price of silver, the CME Group's move to raise the margin requirements of silver futures is a normal response to increased volatility.
Meanwhile, Bloomberg reported this week that some Reddit users are speculating as to whether a mysterious poster on the site could have been part of a pump-and-dump scheme, while working on behalf of some hedge funds that might have infiltrated the WallStreetBets forum.
Replying to the original Reddit thread on silver, one user wrote: “BAN NEW ACCOUNT, attempt of pump and dump.” Another user called the original poster a “hedge fund shill.” Others pointed to a separate Reddit thread suggesting hedge funds stood to gain the most from silver’s surge.
Nevertheless, this failed attempt to "squeeze the shorts" in silver emboldened gold bears to make another attempt to run the stops in the safe-haven metal below $1800, while the huge U.S. dollar short position has begun to unwind. Gold futures traded sharply lower on Thursday, as a firmer U.S. Dollar was in the process of breaking out of a reverse Head & Shoulders base on its daily chart.
With the greenback unwinding the largest short position in a decade, formerly strong support at the 92 region on the USD index could be reached soon. Sentiment for the dollar has improved recently with progress in coronavirus vaccinations, along with moves by U.S. President Joe Biden to pass more fiscal stimulus. Improving economic data has also forced some bearish investors to give up their long-standing U.S. dollar short positions.
Helping to generate the downside pressure in precious metals yesterday were firming U.S. Treasury yields and a less-pessimistic outlook for the U.S. economy. Gold bears began to work on hunting for stops below $1800 after the U.S. Labor Department said that weekly jobless claims fell by 33,000 to 779,000 yesterday morning, down from the previous week’s significantly downwardly revised estimate of 847,000 claims. U.S. jobless claims data has beat expectations five out of the last six weeks.
With gold prices oversold and trading below the 50, 100, and 200-day simple moving averages, the safe-haven metal is bouncing following a broadly weak Non-Farms Payroll (NFP) report this morning. This supports the dovish Fed case, along with the U.S. Senate passing a budget resolution three hours earlier that paves the way for Congress to approve President Joe Biden's $1.9 trillion stimulus bill.
The U.S. Dollar pulling back slightly, alongside U.S. yields, has gold futures back-testing $1800 as I type this missive. But China’s markets will go quiet during the “Golden Week” holiday next week. Historically, the gold price tends to soften on very light volume during this holiday, which may present an opportunity for bears to hunt for stops below the November low in the $1770 region after this oversold bounce.
Although I expect value buyers to come into gold aggressively if the November 2020 lows are indeed tested next week, look for stronger support at the $1690-$1700 level to be seen quickly if the bears are able to run more stops below $1770.
Meanwhile, as the gold price was seeing strong selling pressure yesterday morning, buyers showed up quickly in the miners once the GDX traded down to its November low. And the higher risk GDXJ was unable to sell down to its recent low, while many juniors acted sold out as gold futures were down nearly $50 and trading below critical long-term support at $1800.
Furthermore, the GDXJ/GLD ratio shows the miners may be in the process of creating a sustainable bottom. The higher-risk miners showing relative strength, while gold was slicing through the critical $1800 level yesterday, may be hinting that this now 6-month correction in the precious metals complex has gone on long enough when measured historically in both time and price.
This is a good time for resource stock speculators to take advantage of the current weakness and perform proper due diligence on a carefully selected watch list of quality juniors. If you require assistance in doing so, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.