With fear and uncertainty mounting over the prospects of a global recession, interest rates have been falling. Even though the dollar index is in a bull market trend, the price action in the gold and silver market was explosive in August.
Gold closed July at $1413.30 per ounce on the continuous futures contract. On the final trading day of August, the price settled at $1523, or 7.8% higher. Silver’s ascent in August was even more impressive. Gold’s little brother closed at $16.28 in July and moved to the $18.315 level on the final trading day of August, a rise of 12.5%.
Gold and silver are in bullish trends, and if interest rates in the US and around the world continue to decline, the price path higher is likely to continue. Meanwhile, gold is not just appreciating in dollar terms, but in all currencies. During August, the yellow metal rose to its highest level ever in euro terms. The euro is not alone, as gold is at record prices in many currencies around the world these days.
Gold broke out in June, and the rally continues
After the US Fed signaled that interest rates would move lower in June, the gold market took off on the upside.
The weekly chart of COMEX gold futures shows that the wall of technical resistance at the July 2016 high at $1377.50 melted during the week of June 17 following the Fed meeting. Since then, the trajectory of the price of the yellow metal has been higher, reaching a peak at $1553.40 per ounce at the end of August. Gold moved above the $1500 level after the Fed moved to cut the Fed Funds rate by 25 basis points on July 31 and ended its program of balance sheet normalization. Moreover, the escalation of the trade dispute between the US and China launched the price of the yellow metal to the highest price since 2013.
Silver took a while, but it took the bullish baton in late August
Gold broke higher in the next leg of a bull market that began in the early 2000s in mid-June. It took silver one month to rise to a new high for 2019 as the precious metal lagged its precious cousin. Silver finally moved to over $16.20 per ounce during the week of July 15.
The weekly chart illustrates that the next targets on the upside for the silver futures market were at the 2018, 2017, and 2016 peaks of $17.705, $18.655, and $21.095 respectively. While gold moved well over its 2016 high, silver faces many more hurdles. It took until the final week of August for silver to make a significant move to the upside and conquer the 2017 peak. The price rose to a high at $18.615, just four cents shy of the next level of resistance.
Silver can be a highly volatile commodity when it gets going, as the market experienced at the end of August. After a long period of underperforming gold, silver took the bullish baton posting a 12.5% gain for the month that ended last Friday.
Lower rates will support prices, and the dollar is not weighing on the prices of the two metals
Precious metals prices are moving higher in an environment where interest rates around the world are falling. Gold and silver were not the only metals to appreciate in August. Palladium posted a marginal gain for the month, but platinum and rhodium prices moved appreciably higher.
Typically, a rising dollar is a bearish factor for precious metals prices. However, the dollar index also had a bullish month in August.
As the chart shows, the index put in a bullish reversal on the weekly chart during the final week of last month. The dollar rose to its highest level since May 2017.
Gold remains the leader of the precious metals sector. The yellow metal closed August at just under $400 below its all-time high from 2011 at $1920.70 per ounce. However, it was trading at a record level in a host of other currencies including the Japanese yen, British pound, Australian and Canadian dollars, Russian ruble, Chinese yuan, and others. At the end of August, it reached an all-time in the euro currency.
The rise of the price of gold and the other precious metals is a sign that all fiat currencies are losing value against the metal that has a long history as a means of exchange. Central banks around the world continue to hold gold bullion as part of their foreign currency reserves. Governments can print all the banknotes they desire in the current accommodative environment. Gold comes from the crust of the earth, and its supply is limited to above-ground stocks and annual production. Gold has been making a statement about the value of the paper money that only has the backing of the full faith and credit of the countries that print the legal tender.
Gold has moved to the upside in a falling rate environment, even though the dollar is getting stronger. The dollar may be the king of the currencies, but gold has been the monarch of money.
Levels to watch in gold
At over $1500 per ounce, gold has entered a technical area on the long-term chart where the price corrected from the 2011 high to under $1200 in 2013. The steep decline could lead to a sharp ascent over the coming weeks and months. The next level on the upside is at the April 2013 high at $1602.60 per ounce, but that stands as only minor technical resistance. Above there, the late 2012 high at $1794.80 and late 2011 peak at $1804.40 are the next levels to watch on the upside. The target is the 2011 record high for gold in dollar terms at $1920.70 per ounce. The only other leading currency that gold has not yet reached a record level against is the Swiss franc. The all-time high in the Swiss currency came in 2012 at 1662.61 francs per ounce. At 1505.10 on August 30, gold was 10.5% away from a new high. In dollars, it was still 26.1% below its 2011 apex.
Gold has already climbed to new records levels against most currencies around the world. There is no reason why the same is not in store for the Swiss franc and the US dollar. After all, interest rates are not moving higher, any time soon, anywhere around the world.
Silver has a long way to go, but it can be an explosive metal
If gold is heading towards a new all-time high and will be above the $2000 per ounce level, the road is likely to be slow and steady. Corrections during the bull market will give market participants plenty of time to buy the yellow metal on dips. When it comes to silver, if the path of least resistance for gold is higher, the highly volatile silver market could be in for a wild ride. A break above the 2016 high and level of technical resistance at $21.095 could launch the price of silver like a rocket ship.
As the quarterly silver chart shows, the precious metal took two trips to either side of the $50 per ounce level over the past four decades, in 1980 and 2011. A raging bull market in gold could light a bullish fuse that takes the price to that level or higher just nine or ten years after its last trip to the upside.
Gold and silver are in bull markets. Falling interest rates and declining currency values are a potent bullish cocktail for the precious metals that have been a hard currency for thousands of years.