Gold And Silver Getting Close To A Major Breakout

• Long-term technical structure looks solid
• Gold shares are solid
• Hail silver!

Back at the end of July in an article entitled Has $GOLD Got What It Takes For A Major Rally? I pointed out that gold was sporting some bullish characteristics to the extent that we would probably see a test of previous highs. Whether or not it would go through was an open question then, as it is now. However, there can be no disputing the fact that the technical position, while certainly overstretched short-term has definitely improved during the course of the rally. Let’s begin with the long-term picture and then drill down to shorter time frames and the behavior of several gold intermarket relationships.

Long-term technical structure looks solid

The shaded areas in Chart 1 show when the PPO using the 6/15 combination as parameters is below zero, this is typically a bad sign for the price of the yellow metal and vice versa. Recently, this oscillator, having quickly slipped below zero, has since backed strongly away from it. That’s a good long-term sign, along with the very recent buy signal for the long-term KST in Chart 2. So far so good, but the real upside challenge lies at the green trend line, which is at $1350 for $Gold and $130 for the Gold Trust ETF, the GLD.

Chart 1

Chart 2

Chart 3 shows the potential base in GLD with the upside resistance at $130 in greater detail. Note that the price recently completed a reverse head and shoulders pattern. Its objective is around $140, well above the breakout point. At this time, the short-term KST is positive, but certainly not wildly overbought. One factor that suggests the price is headed higher comes from the false downside break that took place during the formation of the rights shoulder. Whipsaw moves such as this are often followed by above average moves in the opposite direction to the whipsaw.

Chart 3

Chart 4 shows the relationship between Gold and the VanEck Vectors Gold Miners ETF, the GDX. Generally speaking, because gold shares discount the average future price of gold, they have a tendency to lead the metal at important turning points.  The ratio between them has been plotted in the bottom window, where you can see that advances in this relationship typically translate to a similar rise in the price of gold itself. The ratio recently broke to the upside by penetrating its 2016-17 down trend line. Since this action was also confirmed by the GLD and the GDX it’s a very positive setup for gold.

Chart 4

Gold shares are solid

Zeroing in on the shares themselves, we see that their A/D line has just broken out from a one-year base, and is therefore confirming action by the GDX a week ago. Note that the 2016-17 decline was signalled in the exact same way with a joint breakdown of both series, but this time on the downside.

Chart 5

Chart 6 compares the GDX to its bullish percentage (BP). The pink shading shows the bear market, where you can see that the BP was not able to achieve an overbought reading and typically sold off to a very low one. Contrast that to the two unshaded areas, which reflect much more buoyant conditions for the indicator. Note how both periods experienced overbought conditions and rarely sold off to the oversold zone. The characteristics of the 2009-2011 period look like they are being replicated in the 2016-17 period. In other words, since 2016, the BP has been acting more as if it is in a bull market than a bear. All the more reason for paying attention to the fact that the BP has just rallied through its 2016-17 down trend line.

Chart 6

Our final gold share chart features the ratio between the juniors and seniors, the GDXJ by the GDX. The idea is that when the juniors are out-performing their larger cap counterparts it indicates that speculators are growing in confidence and vice versa. Chart 7 shows that the ratio has just violated its 2017 down trend line and that this action is being supported by the two KSTs. All of this suggests that the ratio is headed higher, and with it the gold price itself.

Chart 7

The only negative as we see it lies in the fact that the gold market is currently overbought on a short-term basis. In addition, the US dollar is oversold and well overdue for a relief rally. As we all know, gold and the dollar tend to move inversely. Gold’s overbought condition can be observed in Chart 8 from the 9-day RSI. You can also see that the previous overstretched readings earlier in the summer were  both associated with mere blips on the chart. That suggests that we should focus on the bullish longer-term trend, rather than short-term corrections that may or may not take place.

Chart 8

Hail silver!

The silver price is also positive, since it has just broken above its 2011-17 down trend line. In addition, It  looks set to challenge the solid overhead resistance trend line at just under $19. Positive action by both KSTs suggest that it will be successful.

Chart 9

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.