The tides have turned this week for Precious Metals after a stunning collapse in CPI, followed by a series of weaker economic data points. Fed fund futures are questioning the Federal Reserve’s hard stance. Currently, the latest CME FedWatch tool indicates a 2% chance for the first interest rate cut in January, followed by a 35% chance in March and a 65% chance in May. The modest uptick in initial claims data helped fuel the recovery in Gold, and bargain-hunters aggressively stepped into the Silver market. The Gold/Silver ratio quickly retreated from 87:1 back down to 83:1, leaving us to wonder if this rally is for real.
Daily Gold Chart
After pressing the 50 DMA and trading down to our pocket support ($1950-$1938), Gold futures were able to stage a strong recovery, slicing through the 200 DMA. We want to carefully monitor key levels of resistance at $2000 and $2020. Any breach above should trigger the next wave of short covering followed by fresh buying. Remember that every bull market starts with a short-covering rally. Momentum studies are turning higher, with stochastics rising from oversold territory, followed by the MACD histogram, which is also beginning to rise. We see value in adding short-term options above the breakout point of $2020 and adding micro futures on any weakness to our pocket support. The technicals leave you with a clear line in the sand below $1938 for risk management purposes.
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Daily Silver Chart
Silver delivered a perfect head fake this week, and congratulations to those of you who could grab contracts below $22. We have often expressed on Kitco that we find value in owning Silver for the long haul below $22 and expect that once an economic recovery takes place in China, futures will again test $28-30. Given the sharp rise in prices this week, we recommend not chasing this rally and waiting for prices to trade back into the low $23s before gaining exposure. You should keep an eye on two levels of pocket support from $23 down to $22.86, which corresponds with the 50 DMA. Below that is our trend neutralizer at $22.13, where Silver will revert from a bullish trend to a neutral one.
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Phillip Streible, Chief Market Strategist