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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?

All trading involves risk. Losses can exceed deposits.
Silver figure
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 chart 5

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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