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Are the Gold and Silver Bulls Really Pawing The Ground Before Charging?

Higher Gold To Silver Ratio is Bad for Precious Metals

For unclear reasons the Gold-To-Silver ratio is usually considered moving opposite to the direction of individual Gold and Silver prices with Gold outperforming Silver. Not searching for an explanation but from purely technical considerations we posited early December that the ratio will move higher with a 82 price ratio target for the XAU/XAG ratio:

Gold to Silver Ratio – Ejection Higher – Bad for Precious Metals

Two months later the ratio has come close to our target and is nearing a slightly declining resistance line that extrapolate towards 82.5 in 2018 on the yearly chart:

XAUXAG Yearly Price Ratio Chart

 

This is where we should expect to see the ratio sometime this year, which means persisting  weakness for the precious metals.

High Volatility will preclude any significant upside for the precious metals

One important aspect that must be clarified first: the yearly price trend is still pointing higher for both Gold and Silver, but the volatility (the spread between the lower and higher boundaries) is so high that it should preclude any significant upside for years to come. But instead with the Gold price capped below $1,370 (red segment) and a reverting 7-period moving average that could soon become another cap above prices the most likely direction for gold price is lower:

Gold Ounce Yearly Price Chart

 

At this place we would like to remind about volatility patterns as already exemplified when making a case for the Bitcoin bubble. Gold should attempt to reach into the rising moving average (now at $893) first before any significant upside can come again into consideration as per the bubble shape on the left side of the following graph:

Bubble-English

Volatility Shapes

 

The  bear case is even more convincing for Silver, which price trend appears to be weaker compared with Gold (as it should be expected considering the Gold-To-Silver price ratio strength) with a break below the long term rising trend line (red line) and the down-trending 7-period moving average heavily capping the price. An obvious target is for Silver price on the yearly chart to reach into the 20-period moving average at $14.7 possibly before breaking below it:

Silver Ounce Yearly Price Chart

Precious Metals and Interest Rates

Another relationship that is commonly assumed is for Copper to outperform Gold in case of rising interest rates. With short term interest rates bouncing it should be expected for the Copper-To-Gold ratio – that very much resembles the Gold price in US dollar – to be heading lower:

Gold vs Copper Price Ratio Yearly Chart

Gold Miners Should Go Nowhere For the Next Couple of Years

This is at least the observation that can be drawn from the yearly price chart showing that the GDX trend is still trending lower (red arrow). We should expect the Gold Miners Index to gyrate around the $20 price level for the next couple of years, which also implies a synchronized price decline with precious metal prices in the near future:

GDX Yearly Price Chart

 

The main reason for the miners to fare poorly may be the impact of the cost of energy on the marginal costs of production for the energy intensive and mostly fossil fueled mining sector. With the Gasoline Full Future used as a proxy for the cost of energy that has been trending up robustly in 2017 as per our scenario there should be no reversal of fate for the gold miners until some massive fuel price decline has taken shape and which could as well take a couple of years:

GDX vs Full Future Gasoline Yearly Price Chart

Conclusion

To answer the title question and contrarily to the mainstream analysts bullish view we believe that the bulls raging and pawing the ground will most probably crack it and fall in a bull trap.
Copper should outperform Gold and Gold outperform Silver for the next couple of years as
the price of Gold and Silver are heavily capped below $1,370 and $18.4 respectively.
The bear case will remain valid as long as the above levels are not violated to the upside.
The Gold Miners performance is synchronized with the precious metal prices and apparently as well moving opposite to fuel prices so that they should be trending lower in the medium term.
Since we detain physical gold we are looking to sell Silver into strength.
Hedging a Silver short position with buying Copper into weakness is another strategy that could also apply.

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