Gold’s rebound and short-term discourse from silver

The rebound in gold may be short-lived if the technicals are right in their suggestions, but is there another opportunity in trading the commodity relative to its peer silver?

Shaun Murison ShaunMurison_IG
Senior Market Analyst, Johannesburg

Publication date : 2017-07-13T09:21:47+0100

Source: Bloomberg

Gold's daily graph shows the commodity is starting to rebound after having been stuck in an oversold territory for a prolonged period (highlighted red). The blue arrows highlight long lower wicks on recent candles. These long lower candle wicks show a short-term buying pressure strong enough to push the price of gold off the session lows.

Gold chart 1

While these indications suggest a rebound, the underlying trend for gold remains firmly down. For renewed faith in an uptrend, the short-term rebound will need to maintain a decent follow through and close above the $1230 level, as this would mark the return of significant higher highs in the market, the first building block of an uptrend.

Gold chart 2

However, until this situation arises, we continue to respect the downtrend and look for an opportunity to trade in line with it.

The current rebound resembles a bear flag formation, which is considered a precursor to further decline. These patterns are highlighted in red on the chart below and show a weak move up after an aggressive move down, alluding to the underlying momentum as remaining with the bears.

Gold chart 3

As my colleague, Joshua Mahony, points out, there is also a larger double-top formation (large 'M-shaped' price action above $1218) warning of the potential for further downside in gold over the long term. With all of this in mind, a move to $1194 is favoured from a technical perspective despite the current rebound underway. Traders following the near-term downtrend might consider using a close above $1230 as the failure level.

Gold chart 4

Another opportunity to consider might be the relationship between gold and silver at present.

The chart below shows a relative price chart of gold (red) and silver (black) in the same window and a ratio of their relationship in the window below (blue). While the price movements between the two commodities are usually similar, a mean of that relationship shows a short-term, larger than usual deviation from this mean at around 6%.

If the assumption is that this relationship should revert back to normality or it’s short-term mean, one might consider the pair trade or arbitrage opportunity in taking a long position on silver against a short position on gold, looking for a net return of around 6% excluding costs.

Gold’s rebound and short-term discourse from silver

Gold chart 1

Gold chart 2

Gold chart 3

Gold chart 4

Gold chart 5

Find articles by writer

Markets

CFD trading

Trading platforms

IG analysis

Contact us