Gold price: recent movement and trading opportunities

In this article we look at recent movements in the gold futures and spot prices, identifying possible trading opportunities with the commodity and in relation to silver.

Gold price an inflation hedge?

Gold, often considered a hedge against inflation, has been under pressure at the start of 2021, despite central bank efforts to reignite inflation and a general softening of the US dollar. With short-term risk appetite vastly improved, we take a technical look at how traders may be viewing gold in isolation as well as when paired against silver (gold/silver ratio).

Gold – technical analysis

The black arrows on the pold price chart highlight what is known as the ‘death cross’ in technical analysis terms. This occurs when the 50-day simple moving average (SMA) - green line - crosses below the 200-day SMA (blue line). The suggestion is that the longer-term trend is now negative for the commodity.

However, gold was the second best performing of the major asset classes last year, and we argue that in the short to medium term the price is currently in a sideways rather than down. For commitment to a longer-term downtrend we would prefer to see the price confirmation with a break of key support of the range highlighted below.

The short- to medium-term range for the price of gold is considered between levels 1775 (support) and 1960 (resistance). Circled blue, we see the price reversal near support of the aforementioned range. The price reversal is supported by a move out of oversold territory. The indicator is also showing a hidden divergence signal with the price (red lines).

These are bullish signals in technical analysis terms and favour a rebound with resistance at 1870 the initial target. Traders who find long entry might consider using a close below range support at 1775 as a stop-loss consideration.

Should the price instead move to close below the 1775 support level this would consider failure of the range trade and a downside breakout, adding credence to the longer-term bearish signal inferred by the ‘death cross’.

Silver – technical analysis

The price of silver remains in a longer-term uptrend as the 50-day SMA continues to trade firmly above the 200-day SMA. In the medium term, however, we see that the price is currently within a broad range - between the 2175 (support) and 2980 (resistance) levels.

We have recently seen a reversal off resistance of the aforementioned range, and traders looking for long positions might prefer to see further weakness playing out before finding entry.

Gold/silver ratio

The below candlestick price graph is that of gold. The indicator (blue line) on the chart shows a ratio of gold (numerator) relative to silver (denominator).

The ratio has a mean (moving average) added (dotted red line) with two standard deviation line above and below this mean. The green arrows show how on a short term basis, when the ratio moves below the lower deviation line it has often reverted back to and sometime past the mean.

Movements below the mean suggest that from a short-term trading perspective that, gold is under performing silver on a relative basis. Traders might interpret this as a pair trading opportunity looking for a long position on gold against a short position on silver.

The net result of these combined trades looks for a 6.5% profit margin should the ratio revert back to the mean. A stop loss is considered of equal proportion to the expected gain.

A successful pair trade can be realised one of three ways:

  1. The long position rises while the short position falls
  2. The long position rises faster than the short position rises
  3. The short position falls faster than the long position falls

In summary

  • Gold price weaker despite central bank attempts to reignite inflation
  • Longer-term technical analysis view shows a ‘death cross’ having recently occurred
  • In the short to medium term, the gold price trades in a range and has recently shown some bullish indication at key support
  • The long-term trend for silver remains up, although we have recently seen a bearish reversal off resistance
  • The gold/silver ratio highlights gold's recent underperformance of silver

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