Global Uncertainty Could Push Metals Higher (Commodity:XAGUSD:CUR)
It’s been roughly three months since I last covered the precious metals space. In my last Gold (XAUUSD:CUR) article I speculated the Federal Reserve might not actually be able to raise interest rates in a meaningful way.
The time to raise interest rates was months ago. Not not. Not tomorrow. Months ago. When inflation was really hot during the 1970’s, the Fed raised rates to combat it. Different time. Different chair. Jerome Powell is not Paul Volcker.
Since then, we’ve seen the CPI continue to move higher than many have expected after printing year over year changes above 7% in both December and January.
Despite the highest rate of inflation in 40 years, we still don’t have action from the Fed on rates. With this backdrop, I decided it was time to revisit Gold and Silver (XAGUSD:CUR). This time though, the beginning of my article will focus more on the technical setup for both.
My Technical Read on Gold
The relationship between Gold and Silver is well documented so I won’t rehash that here. What’s interesting technically speaking is Gold has now broken out of a wedge that had served as support and resistance going back roughly a year.
The 50 and 200 day moving averages in Gold have been very close for the last 8 months or so. I count five crosses of those averages in that time frame. We can see based off these crosses that Gold has struggled to pick a direction. I think the breakout of the wedge to the upside is an indicator that bulls are going to retake control of the trend going forward. For Gold, it’s the monthly chart though that excites me the most.
Maybe I’m just really craving a good cup of coffee and I’m seeing what I want to see, but that’s a pretty clean looking cup and handle pattern in Gold to me. Very bullish long term.
Silver Isn’t as Clear
Noticeably lagging Gold during this recent breakout has been spot Silver. The direction signals from the averages haven’t been as mixed in silver as they have been in Gold. We haven’t seen the 50 and 200 day moving averages in Silver cross since August. Spot silver has held the 9 day moving average though for four consecutive days. It appears poised to test the 200 day moving average of $24.28.
Silver’s MACD is also positive and the RSI looks to favor upside average for bulls. If we draw a similar wedge in Silver that we had in Gold, we can see that after a failed breakout at 200 day MA resistance a few weeks ago, Silver appears to be attempting another breakout today. I expect that the 200 day will serve as resistance again. That said, I believe Silver will follow Gold and break through that resistance. If it fails to do so and reverses, I think another test of $21.50 could be possible.
Frankly though, I think the only way Silver moves down again is if the economy enters a recession and the metal gets beaten up for it as an industrial commodity. But in that instance, weakness would likely be a buying opportunity because the response to a recession would probably be more currency debasement. Which would figure to help Gold and by extension Silver.
There is a considerable amount of political uncertainty at this time. We’ll start with whatever it is that is happening between Russia and Ukraine. It is possibly having an impact on the broad equity market.
President Joe Biden said there is a “very high risk” of Russia invading Ukraine within “several days.” Futures slumped overnight after Russian state media reported that Ukraine forces had fired on Dunbas. Ukraine denied the claims and accused Russian-backed rebels of firing on a village.
Conflict is bad, but financial instability figures to have a more direct impact on markets. This week, Canadian Prime Minister Justin Trudeau invoked the Emergencies Act and said the government will freeze the personal bank accounts of anyone who is linked with the protests that are taking place throughout Canada. This course of action can potentially lead to bank runs in Canada and there is evidence that there is interest in the idea brewing already.
Google Trends data in Canada shows a huge spike in search interest for “bank run” over the last 7 days. And while this could certainly be reactionary search interest as opposed to a premeditated course of action, there was a noticeable spike in outage reports at some of the Canadian banks yesterday. Those outages appear to have subsided based off the latest data.
It’s all very interesting. And I think it would be wise to consider what is happening in Canada and what the response from the government there has been. While I’m hopeful that the financial oppression that is being proposed in Canada will not lead to financial instability in that country, if that does happen, that could theoretically create contagion if citizens of other countries start withdrawing deposits at scale as well. To be clear, I don’t think this is a high likelihood scenario. And I also don’t think Gold and Silver need financial instability to appreciate in price from here. But metals will probably have a strong reaction if there is a widespread move to withdraw wealth from the financial system.
Though frustrating for precious metals advocates, I believe we’ve been in a bullish consolidation for about a year and a half. I think the expectation that the Fed will raise rates to battle consumer price inflation has also weighed on the upside in Gold and Silver. As I wrote Thursday morning and previously for Seeking Alpha, I am very skeptical that rates can be meaningfully raised to battle high consumer prices. Overblown or not, there is concern over what is happening between Russia and Ukraine. While I have historically covered Sprott funds for my Gold and Silver exposure ideas, I am a little concerned about what I’m seeing in Canada at this time. I think the better actionable insight is to actually buy the physical metal to self-store.