Gold and Silver have basically gone nowhere in the past week as the next FOMC meeting looms large next Wednesday, June 19. This will decisive in determining whether or not the metals and miners continue higher or suffer a pullback in the short-term.
Scenarios for the FOMC are as follows:
Uber Dovish: Fed cuts rates by 25-50 basis points; announces the immediate end to balance sheet reduction; plans for a standing repo facility where the banks can swap treasuries for cash; and/or a cap on 10-Year Treasury Bond yields at 2% or 2.5%, equivalent to QE.
Under such a scenario, expect everything but the dollar to soar!
Dovish: Fed cut rates by 25 basis points ‘or’ one of other alternatives above only.
This is already priced in given the move up in stocks and precious metals and the move lower in bond yields and the dollar. The risk here is that this becomes a “buy the rumor, sell the fact” event and all of the recent moves reverse somewhat. Perhaps an initial pop followed by a bigger drop.
Neutral: Fed does not cut rates, maintains its expectation that rates will remain on hold until the end of the year.
Should this occur, I would expect markets to be sorely disappointed and stocks and precious metals to plummet, yields to rise, and the dollar to spike higher.
There are cases to be made for each outcome so I will not try to guess which transpires. Suffice to say that this could be one of the most eventful FOMC meetings since September 2015 when the Fed decided not to raise interest rates, against all expectations.
In the meantime, a quick update on the technicals, sentiment, and positioning...
Since the previous article last Friday, the RSI has fallen from a peak of 75 to 63 and now risks a negatively divergent higher high at 70 or above. The same goes for the MACD Histogram.
Resistance is at ~1350 and above there 1370-80. Support is at the recent low of 1323.
Sentiment at 66 remains near its recent high of 68 and could even go higher before it peaks.
Funds are even longer than they were at the peak on Feb 20 and maybe even longer than they were on June 4 given the increase in open interest from 481k to 503k today.
We are seeing the same thing on the short side for the Banks.
This provides support for my expectation of a pullback before we can go higher. But, again, that depends on the Fed next week.
Silver has lagged Gold so far and therefore has less issues to deal with on the upside from a technical, sentiment, and positioning perspective. Its RSI is at 60 and has run into resistance at its 200-day moving average. It could go either way from here in the very short-term. Even if we do get a slightly deeper pullback, this only sets us up better for the rally to follow imho.
A break of resistance of 15.15 targets key resistance at 16.20 next. Above there, the next level to break is 16.50. Through there and “see ya!” time imho. Support is 14.63.
Sentiment remains supportive at just 43% bullish.
Funds were racing to cut their short position on June 4 th and Banks were slashing their longs at the same time. Even though the price is relative unchanged, open interest has soared by 40k contracts since then to 231k as of yesterday. If Funds continued to add long positions at a rapid pace and Banks were doing the same thing on the short side, then the case for a short-term pullback grows. That said, with the positioning of the Funds and the Banks around the neutral level, the bias is clearly to the upside whether we get a further pullback or not.
Comparing the two, Silver clearly has the potential to outperform Gold here on the upside and even if Gold does pullback, Silver will likely do so also but to a lesser degree. The Gold:Silver ratio at 90 also supports this hypothesis.
Finally, the miners have performed extremely well recently, but GDX set a negatively divergent higher high today based on its RSI and MACD and is clearly overbought. The MACD Line now exceeds its peak in February. It is also just shy of its key resistance zone between 23.35 and 23.70. A pullback here to a 29 handle would be healthy to provide the energy to break that resistance and truly explode higher.
Again, all eyes on the Fed on Wednesday next, but even if we do get a pullback following their decision, I believe it will just provide the energy for metals and miners to blast higher in a wave 3 next, the money wave!