Check out silver for a view on gold

For gold traders, the last few months have been challenging to say the least, with the precious metal lurching higher and lower driven by fear, the US dollar, a singular lack of any inflation and seasonal supply and demand. At times like this it can help to look at related or associated markets for an alternative view. One such is silver, which has been more measured in its price action over the last few weeks, remembering as always, that silver is not a precious metal, but an industrial one, and the daily chart for the December futures contract delivers some interesting insights.

The move higher for silver in June and into early July was accompanied by strong volumes, with the rally finally running out of steam as it hit the resistance level defined with the blue dotted line in the $21.60 per ounce area. Given the previous accumulation in this area, any move beyond this region would have delivered support to the move higher. However, silver duly sold off, moving firmly through the potential support in the $20.80 per ounce region, another area of price accumulation, and down to test the $20.50 per ounce price point. This was the key move for silver in August breaking below the red dotted line, a deep area of distribution, which once breached added further bearish sentiment to the move, with the wide spread down candle of mid August accompanied by high volumes at 60k on the day. Since then, the metal has moved into an extended phase of price congestion, finding support in the $19.40 per ounce region, and balanced neatly on the blue dotted support line, which has held firm to date. This level has been tested several times, and in early trading on Globex this morning, appears to he holding firm once more, as the metal bounces higher in early trading ahead of the US GDP release later today. The gravestone doji candle of Tuesday was the first signal of a possible short term reversal in sentiment. However, from a technical perspective, the support level at $19.40 per ounce is key, and if this is breached, then expect to see silver move lower in due course. The conundrum as always with silver is its relationship to the broad economy, given its commercial applications, and perhaps, like copper, this is signalling that the current bullish trends for equities are driven more by hope than fact. Today’s GDP data will no doubt deliver the ‘facts’ albeit 3 months out of date, and with a resurgent US dollar the outlook for silver and indeed gold remains bearish in the longer term.

Moving to the weekly chart, this too reveals the broader picture for the metal, and perhaps even more clearly, we can see the support regions now coming into play below, with the solid blue dotted line at $18.70 per ounce, now critical. Since 2013, this level has held firm each time it has been tested, but any move through here, will then see silver prices move sharply lower. With the deep resistance overhead in the $20.50 per ounce area, and the support region below, this channel of price action now defines the boundaries for silver. Any breakout from this region should then set the longer term trend for both silver, and of course for gold.

By Anna Coulling