Special Report: Gold, silver pare earlier daily losses; expect high volatility again next week

(Kitco News) - Gold and silver prices near midday Friday have clawed back most of their overnight losses following a tame U.S. CPI report that puts the Federal Reserve firmly on track to lower U.S. interest rates by a quarter-point next week.

This week, the daily price volatility in gold and silver futures markets became so extreme that both bulls and bears could have been forced out of the markets in the same trading session, due to major whipsaw price action. Look for continued higher volatility next week in both precious metals markets, which if is indeed the case would favor the bears. What the high volatility has likely done is drive many speculators out of the gold and silver futures markets because they are scared to trade such volatility. Less participation from the speculative segment of futures markets is generally bearish, as it can be argued that the majority of speculative traders would rather play the long side than the short side.

For those gunslingers still willing to trade the gold and silver markets straight away, the micro and mini gold futures are the way most should do it. Even trading the smaller-size contracts during such volatile market activity can be very risky. The smaller-sized futures contracts allow traders to access the markets with a lower capital commitment. Micro gold futures from the CME Group (MGC) represent 1/10th the size of a standard 100-ounce Comex gold futures contract, meaning each contract is for 10 troy ounces of gold. The smaller size translates to significantly lower margin requirements, making them ideal for new traders or those with smaller trading accounts. With a smaller tick value (10 cents, which equals $1.00, meaning a $1.00 move is $10.00 in value), micro gold futures offer less financial impact from price movements, which makes them a useful tool for testing trading strategies or managing smaller-scale portfolios.

Fundamentally, the gold and silver bulls can argue there are still bullish elements at play. The U.S. government shutdown has entered its fourth week, with no signs of ending, which means there continues to be a dearth of important U.S. economic data. That means keener uncertainty in the marketplace and that’s bullish for the safe-haven metals. 

Lower global interest rates are likely in the coming months. After next week’s Fed rate cut, the marketplace still thinks the Fed will make up to two more cuts of one quarter-point. Recent weaker economic data out of China has the Chinese government saying it will ease its monetary policy in the coming weeks/months. Other countries, including Canada, the U.K. and Australia have also lowered interest rates.

However, psychologically, a lot has changed in the past week. Let’s face it, gold and silver bulls and bears were both spooked at one time or another the past week. This favors the bears.

The U.S. stock indexes have also made solid rebounds and today (Friday) hit record highs. The stock market is a competing asset class with safe-haven metals. The stock indexes at record highs suggest better risk appetite in the marketplace, which is bearish for gold and silver.

The U.S. dollar index has been trending higher since mid-September. Generally, a rallying U.S. dollar index is a bearish element for the gold and silver markets. 

Let me leave you with this important point, which I warned you about last week: Probably the most important factor that I think will determine where gold and silver prices are headed: Silver above $50.00. Reason: Price history over the past 50 years shows that when silver prices reach $50, or get close to it, which has occurred three times now, the first two times saw silver trade above $50 for only a short period of time. Two weeks from now, if silver prices are above $50 an ounce, then the marketplace can start to believe both gold and silver are entering new, longer-term price ranges that will continue well above what price history of the past 50 years has shown. And if silver stays below $50 in the next week, history will again repeat itself--and that would suggest gold and silver are due for extended downside price corrections and even bear markets farther down the road, to continue the historical cycle of boom and bust seen in all raw commodity markets. Right now, it appears silver prices are going to have a difficult trek to get back above that key $50.00 level.