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Are there any chances for gold and silver?

Hello, dear colleagues!

Recently, the general information background remains negative for precious metals. Numerous forecasts of venerable analysts say that gold and silver will have a significant decline. But is this really the case and is there a chance for gold and silver? We analyze it in this article.

Speaking about gold, as, indeed, about any other asset, it is necessary to consider the situation from the point of view of complex assessments. Neglecting or, conversely, exaggerating the influence of a particular factor can lead to significant errors in calculations. Therefore, we will try to assess the prospects of gold by considering various factors that affect the price, and this will help us with the study of the World Gold Council, where, based on the proposed model, we can draw conclusions about the degree of influence of various factors on the price of gold, including economic growth, interest rates, exchange rates, investor risk sensitivity, price moment and trend, as well as unknown components of supply and demand that cannot be taken into account (fig1).


Figure 1: Factors affecting the price of gold

As we can see from the diagram, even such a solid organization as the World Gold Council cannot take into account all the drivers that affect pricing, given the high degree of influence of the gray zone on the precious metal's quotes. At the same time, attention is drawn to the insignificant impact on the price of the foreign exchange market and the drivers of economic recovery. But interest rates and the price moment had a rather strong impact on quotes in the first half of 2021, so let's analyze these two factors as the most influencing the price in the current situation.

The report on newly created jobs in the United States, published last Friday, showed rapid job growth and a decrease in the unemployment rate to 5.4%. The release of the report was accompanied by conversations of Federal Reserve officials about a possible rate hike in the winter of 2022-2023, which led to an increase in bond yields (Figure 2). This immediately led to a negative reaction in gold and silver, which collapsed under the weight of positive factors of the recovery of the US economy, which became a negative for gold.


Figure 2: US Government Treasury Bond yields

The decline continued on Monday, August 9. Taking advantage of the situation of the thin market, gold was pushed to the level of $1,685, which was facilitated by the stop orders set to fix losses. Japan and Singapore were closed for the holidays, which reduced the low liquidity in the Asian session.

Many traders hurried to buy the cheaper gold, which led to the price recovery to the level of $1,750, and now the participants are counting on an early increase in quotes, but I would urge them to be especially careful. The fact is that the negative in gold has not gone away. The yield of US Treasury bonds has formed a "double bottom" reversal model (Fig. 2), which implies a continuation of the yield growth and a fall in the price of government bonds, and, as we know, gold does not feel very well when the yield in this market is growing.

At the same time, the demand for gold on the futures market still remains at the minimum values and reaches 628,000 futures and options contracts, which means a negative price moment. Moreover, demand continues to decline: four weeks ago, Open Interest was equal to 660,000 contracts. Speculators who started buying gold in July stopped building up long positions and froze in anticipation.

Unfortunately, the situation in silver is even worse than in gold. More recently, futures market traders were radiating optimism. However, in mid-June, the situation changed to the opposite. In June 2021, at the peak, the value of Open Interest reached 221,000 contracts, but by mid-August, demand fell to 163,000 contracts in futures and options, which is a 9-year low. Both the bulls and the bears actively left the market.

The US unemployment report has become a trigger for a sell-off, and it should be noted here that during the release of these data, volatility in gold and silver traditionally increases. For some, this may be a good thing, but those who are not ready for such a development of events or do not take it into account, expose their deposits to extreme loads.

They say that the chart takes into account all factors, so before making final conclusions, let's look at the technical picture in gold. Note that the daily time assumes the prospect of the dynamics of the asset for one to three months. Based on this time perspective, we will consider the current situation.


Fig. 3: Technical picture of gold

Gold was in an upward trend before the US unemployment report was published. However, the sales on August 6 and 9 became Hiroshima and Nagasaki for gold. The price broke through the support of $1,750 and broke the structure of the rising trend, forming a series of consistently falling lows and highs, which implies a correction to the upward trend lasting from one to three months.

From the point of view of technical analysis, the bulls' problem is also the fact that in order to identify the decline on August 6 and 9 as a "false breakout", allowing the resumption of purchases of precious metals, it is necessary that the price of gold not only returns to the range of 1750-1835 dollars, but also closes above the level of $1835. As an option, it is possible to form another reversal pattern at the current values or lower, but we do not see such a pattern now, and it will take time to form it.

In the gold/silver pair, gold is the leading asset, and it is not possible to count on the growth of silver in isolation from the growth of gold, due to the volume of the markets. Silver is a more volatile asset than gold, so it can change by large amounts in percentage terms, but the probability that silver will start to grow against the background of a fall in gold tends to zero.

Summing up, we can draw the following conclusions: the situation on the precious metals market does not favor the bulls at the moment, because from a fundamental and technical point of view, the probability of a decline is greater than the probability of growth. Traders can consider the possibility of selling gold and silver, taking into account the factor of the direction of the main trend of the higher half, which is directed upwards, which implies a reduction in the size of the positions opened at least twice. In turn, investors who have already bought gold can take a break and not rush to accumulate a long position, i.e. it is quite possible that the purchase price may become more attractive than it is now. Traders should refrain from buying gold, at least until the graphical and indicator picture becomes more definite, providing them with a positive mathematical expectation of the outcome of the transaction.

Answering the question put in the title of the article, "are there any chances for gold and silver?", we can say this: there are chances, but not very big yet, so now it is better to take a pause, it is possible that the situation will change in a positive direction over time, and then I will definitely inform readers about this in my article. Be careful and careful, follow the rules of money management.

The material has been provided by InstaForex Company -