Silver Leads Gold In Rate Hike Cycle

May 23, 2017

Since Chinese New Year buying peaked in February, gold has essentially traded sideways with a mild upside bias.  Here’s why:

Indian dealers are waiting for the government to announce the GST rate for gold, and it’s too early for them to begin stocking up for Diwali.

So, the price discovery ball is now in the US central bank’s court.  I’ll dare to suggest that most gold market investors don’t fully understand the relationship between interest rates, money velocity, and gold.

Gold rises when events create or signify rising risk, regardless of what those events are.  Sometimes a decline in interest rates increases risk, and sometimes a rise in rates increases risk.

In the current environment, rising rates increase the odds that banks will lend money so aggressively that inflation rises much faster than interest rates.

Interest rates are incredibly low from a historical perspective, so gold investors who are inflation enthusiasts need to exercise patience.  It takes time for rates to rise enough for banks to become aggressive (and perhaps reckless) with lending policy.

In the current hiking cycle, there have been three rate hikes.  As I predicted, each hike has been followed by a superb rally in the price of gold.

The good news is that the next major Fed rate hike announcement should happen on June 14, which is now only about three weeks away.

This is the daily gold chart.

From a technical standpoint, the $1265 resistance zone has halted most of the recent gold rallies, but the overall price action feels very firm.  Gold investors should feel strong and confident.

This is the COT report for gold.

It’s clear that the “smart money” commercial traders have a positive outlook; they are covering lots of short positions and adding a decent number of longs.

The COT report for silver is also very positive.  The commercial traders are solid buyers and they are also covering short positions.

These COT reports should add more confidence to the average metals market investor’s belief that a post Fed rate hike rally could be a very big one! 

This is the long term weekly gold chart. 

A breakout above $1265 should occur after the June rate hike, and the rally following that breakout should take gold above the downtrend line that I’ve drawn from the $1923 area high.

In the big picture, gold has traded sideways in a large rectangular pattern for almost four years.  The rough trading range of that pattern is $1100 to $1400. 

In my professional opinion, the sideways action is coming to an end… both technically and fundamentally.

The target of an upside breakout from the large rectangular pattern is the $1600+ area.  That is good news for a lot of gold and silver mining companies. 

Most gold miners have costs below the current price of gold, but an extra cushion of $200 an ounce should turn them into a herd of cash cows.

This is the long term silver chart.  Silver broke above its downtrend line back in 2015.  That breakout suggests something similar is coming in gold. 

If it’s accompanied by an uptick in money velocity, gold and silver stocks could shock most investors with a nice move higher.

This SIL silver stocks ETF chart has also broken above its downtrend line.  It’s trading well above the 2016 lows, and is poised to make silver stock enthusiasts very happy, very soon.

On a technical level, silver has a general tendency to lead gold.  On a fundamental level, it is the rise in interest rates (both current and prospective) that should reverse money velocity.  That will change the technical charts from their current sideways price action to rally mode.  Odds are growing that this happens at the same time as Indian dealers begin stocking for Diwali, adding some serious “juice” to the rally!


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Gold falls on firm dollar, China rate cut lends support