Citi: Are Gold And Silver Finding A Bottom?

Tyler Durden's picture

Gold and Silver appear to be in the process of finding a bottom; however, the price action could continue to be choppy in the coming weeks. Ultimately Citi's FX Technicals group, as the following charts suggest, expect both precious metals to move much higher in the long term with the potential for Silver to be the outperformer, as was the case from 2008 to 2011.

Via Citi FX Technicals,

Are Gold and Silver finding a bottom?

Gold and Silver appear to be in the process of finding a bottom; however, the price action could continue to be choppy in the coming weeks. Ultimately we expect both precious metals to move much higher in the long term with the potential for Silver to be the outperformer, as was the case from 2008 to 2011.

Our original target for this Gold correction was $1,260, which was the target of the double top. This would also have resulted in the same high to low move on a percentage basis as seen in March – October 2008.

Gold has overshot that target, though only slightly (the 2008 high to low correction was 34% while this one has been 36%). The bottoming process in 2008 can still serve as a template for what might still come for Gold:

  • After rallying through September-October 2008, Gold made one final push down to a low 7.4% lower than the previous one
  • After rallying through April, Gold has made a push lower and similar move to the last one in 2008 would suggest a bottom would be put in at $1,224. The low so far has been $1,221 and consolidation seems to be taking place.

Daily momentum is also at the most stretched level seen since the Gold correction in 2008

One important thing to note is that after posting the low of the correction on October 24, 2008, Gold did not immediately shoot up in a V-shaped bottom. Rather, it consolidated over the next 2-3 weeks and did not begin the next move higher until after turning off of the 76.4% retracement of the bounce off the lows and then breaking through the pivot. This suggests that if $1,221 is the low, we may still see some choppiness in the price action over the next few weeks.

Our only concern at this point is that the correction in Gold may be more like that seen from 1974-1976

The high to low correction during that time was 44% and a similar correction this time would suggest a Gold price closer to the $1,050 area. The timing would be closer in similarity as well as the correction in the 1970s took place over 1 year and 8 months whereas this one has already taken place over 1 year and 10 months (meanwhile the 2008 correction lasted only 7 months).

The most important thing to note is that whether we are seeing a pattern more like 2008 or the 1970s, we do not see this as just the beginning of a bear market in Gold; rather, this should simply be another correction in the upward trend. This would be similar to what we saw in both of those time periods (a deep correction setting up for the next move higher which would take Gold higher by multiples). We still remain of the bias that Gold will find a bottom soon and that in doing so it will form the base for a new leg higher which can take Gold to our target of $3,400 - $3,500 by 2016. Before we get there, though, we may need to see more stresses to riskier asset markets. As we have previously seen, moves higher in Gold are accelerated by either:

  • Global stresses - Europe and China come to mind as potential catalysts, with the possibility of another Euro crisis becoming more real as highlighted in Chart of the Week. The potential for tapering by the Fed has shown just how sensitive asset markets are and how easily panic selling can take place.
  • Increasing balance sheets of Central Banks / debt levels of governments - “taper talk” is still just talk and even when/should it begin, there is no plan to actually reduce the size of the Fed’s balance sheet; meanwhile, other major Central Banks are still in the process of accommodating or increasing their balance sheets. On the debt side, there is no indication that any major economy is actually reducing the size of outstanding debt any time soon. This might actually suggest that when Gold begins to rally again, the price change in other currencies may be greater than that in USD (a topic we will likely revisit in the future).

These dynamics continue to suggest to us that the long term trend of higher Gold prices is very much intact.

Silver should also follow suit as it attempts to find a bottom. Once it recovers, it may actually be the outperformer of the two…

As with Gold, we think the correction in Silver should end up being similar in magnitude to that seen in 2008. The 60% correction would suggest Silver bottoming around $19.75, though it has already overshot that level. However, as with Gold, our bias is that Silver is in the process of bottoming before a more aggressive move higher, such as that seen after the correction in 2008. That suggests a move in Silver to over $100 by 2016.

The Gold/Silver ratio shows that in the correction of 2008, Silver severely underperformed Gold (correcting 60% versus 34%). Then as both moved higher, Silver outperformed, rallying 488% versus 181% for Gold.

This correction again has seen Gold do better (less badly?) and the ratio is approaching resistance around 67, the 76.4% retracement of the 2009-2011 move lower. If Gold and Silver are bottoming, as we expect, than it would not be surprising for the ratio to begin to turn around the resistance area as well. This would mean Silver could once again be the outperformer over the next few years.