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Gold and Silver Spot Price Technical Analysis: Historical Parallels ahead of FOMC

$1300 proves to be a decisive support for Gold

by Victor Kerezov

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iNVEZZ.com, Tuesday 17 September:

In the recent financial world shaped by central bankers, precious metals are swinging like a pendulum between the emotional poles of euphoria and panic. Gold and silver were in vogue after the recent recession as cheap-money from quantitative easing fuelled speculation of hyperinflation and devaluated the US dollar. Commodities peaked in 2011, following the culmination of the Arab Spring and the death of Osama bin Laden, marking the end of ‘’fear’’ trade. Since then the US dollar has been the strongest currency across the board, with the Fed deciding not to expand its monetary base and launching ‘Operation Twist’. Despite the US central bank agreeing to increase its quantitative easing programme last year, precious metals did not continue their long-term uptrend and found three-year lows in June 2013. The downstream was prompted by the rise of US real rates as Treasury yields recovered from record lows and inflation expectations remained subdued.

On the eve of the widely anticipated FOMC meeting, investors are puzzled by the precious metals outlook and what effect a potential tapering announcement might have on prices of precious metal commodities. The conventional market interpretation is that as the US central bank shifts policy away from expansion of the monetary base, the artificial support for precious metals will diminish.

The market dynamics over the last 2 years have remarkably resembled the asset kinetics from 1987 to 1989. Silver has been the emotional proxy of the commodity sector, with its May 2011 top preceding the all-time peak of gold spot prices in September 2011 similar to 1987. The S&P 500 collapse in August 2011 mirrored the 1987 panic and gold peaked around the stock markets’ bottom in both cases. Since then the S&P 500 has recovered across similar momentum(RSI) fingerprints and surged to an all-time high, while precious metals have been in a volatile downtrend analogous to 1989(see chart below).

The movements of silver have also shown parallels with price impulses from 1987 to 1989, with the current price action resembling the fall of 1989. A closer look of the comparatives indicates that the momentum profiles of both periods are quite similar and the Relative Strength Index exhausted as it reached the same level of 80 on the daily chart. The surge this summer may have been a relief rally as precious metals recovered from 3-year lows, but was also due to rising inflationary pressures that resulted in widespread anti-government protests across the world. It is worth noting that the fall of 1989 was marked by revolutions in Eastern Europe that culminated in the collapse of the Berlin Wall.
The sharp retracement rally for precious metals this summer is also attributed to the geopolitical risks in Syria and the threat of spill over of the tensions across the Middle East. The previous secular bear cycle of silver and gold, following the peaks in 1980, also saw a similar cyclical price upturn provoked by perceived Middle East risks. In 1981, Israel conducted a surprise air strike against Iraq’s nuclear reactors also known as Operation Babylon that lifted precious metals as fear crept onto the market floors. However, silver spot prices rolled over once the UN called on Israel to refrain from further preventive action and the world criticised Israeli aggression. The comparative below by Erik Swarts, independent trader and writer of the marketanthropology blog, illustrates the congruent price action and RSI momentum profiles of 1981 and 2013. Similar to 1981, the latest sharp declines across precious metals have coincided with the fading geopolitical risks with Russian president Vladimir Putin criticising potential preventive strikes from America. According to Swarts ‘’although the catalysts and motivators between comparisons are more than likely dissimilar, the market reactions to various hopes and fears is quite repetitive.’’
Even though silver has historically led precious metals’ sentiment and previous cycles advocate a rather bearish conclusion to the year, it is worth keeping an eye on gold technical analysis as well. Erik Swarts has also highlighted the possibility of tapering actually creating inflationary pressures, which will shrink US real rates and create demand for precious metals. The last American rate-tightening cycle began in 2004 and gold seems to be carving out a similar bottom like back then. The 2004 comparative calls for the 1300 support to be the key level, if it hold bulls may be confident of the uptrend’s resumption.

*Please note that all charts in this article are from last Friday.

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