Most people reading this from Twitter are learning a lot about PMs as we go. I had 4 years of MBA studies at 3 schools before finishing it (moving has a way of stopping your grad school for some reason) and with this, you never learn one word about gold and silver. Many of you are even newer than me – going on 2 years about right now since the Sept 16th overnight repo fun.
One thing many of you also learn is that sometimes, the DXY is a headwind for gold. Sometime, you can see them move in tandem. You also learn about the many other things that move gold – one being “real rates”. Like many of you who also had the traditional business schooling – I didn’t understand gold and how it moved, and a lot of the algos now are set to see higher interest rates as bad for gold. Many of these 26 year old quant people are confusing interest rates going up due to a hot economy with interest rates going up due to massive inflation pressures. I feel, like many, when this epiphany gets around the thick skulls of those programming the quant, that gold goes into the next level of existence, and quickly.
That being said, on the day to day, you often see gold and silver move opposite of the DXY. In this piece, what I want to do is to examine the last few technical moves in the DXY, compare it to gold, and then look how the current pattern is forming to predict where gold might go. Sounds reasonable – but as anyone knows, gold may get squashed just because, even if the DXY is going down.
So with this, let’s take a look at the big picture and then drill down.
If you start at the weekly – you can go back and see that it appears we are in a giant triangle that wants to resolve soon. You can see 12 years of sub 89.5. Many feel a DXY under 89.5 could then break down much further to the lines of resistance you see with dotted lines.
Many like to point out that we’ve been in a gold bull market since 2015 or so, so I want to go back to then on the daily charts and look at some of the major chart patterns that happened and compare these times with gold.
Overall, I see 4 major patterns that evolved.
1 – Massive head and shoulders from July 2014 to Jan 2018
2 – Ascending Broadening Wedge (ABW) from June 2018 to February 2020 (right before March melt down)
3 – Pennant formation from March 2020 to February 2021
4 – ABW from June 2021 to now.
What you can see is these technical patterns are getting shorter in duration as the triangle is getting compressed. What did gold do over those time periods?
I overlaid the time periods with gold and you get pretty much the inverse move – with one exception in period 2.
Let’s look at each period in DXY and gold.
The DXY above had a H&S over several years and traversed 29%. The net result during that time was the DXY went from 80 to 89.4. You can see the peaks above. This is a reversal pattern so you can see it come up, stick around for a bit, and reverse down.
This is the technical pattern…
With gold – you see sort of the inverse, but the peaks in the DXY are dulled valleys with gold. This traversed 33%.
This is where gold and the DXY moved together – but it seemed gold moved a lot higher.
The DXY is in an ascending broadening wedge (or perhaps a channel), which is typically bearish. You can see that while the number goes up on the chart with the bottom rail, that the RSI gets lower and lower until it eventually drops off here. We moved up only 7% in the DXY, but 46% in gold. Telling me gold significantly outperformed the DXY even though the chart patterns resembled each other.
With gold, let’s see how that went. This is a STRONG leg up of about 46% while the DXY was also going up.
This is right after the March 2020 crash. With the DXY, you can see a pennant formation which resolved in an up move. The DXY went down about 15% during this time.
What did gold do? It looked like it continued up with the broadening wedge and for a time went up with the DXY.
However, we all know how August started the pullback. That move RIPPED up 43%, but then came back down to earth, still ending UP 16% during that period. So the 43% up move needed to significantly cool off, but you still see nice gains during that period. This was a channel down, flag, or perhaps even a slightly descending broadening wedge. This bottomed in around February, then had a nice 3 month up move.
While this move in ongoing, take a LOOK at that deep slope down in RSI at the bottom rails of this ascending broadening wedge.
This could indicate the next RSI move down could be hitting in the 30 range. What we saw in the previous one was a move down to 30, a move up, then full capitulation with an RSI below 25.
With gold, we are seeing the reverse wedge. It is a descending broadening wedge. It’s a continuation of what started last August – and one can make the argument that we exited that and we are going sideways since perhaps March of 2021.
What am I seeing?
First – you need patience in this game. Good thing I played an 8 hour game in the World Open of Chess in 1991.
Second – while the trend has been going down, I’ve been trying to play some volatility with the up moves. Things I bought near the top obviously got hammered, hard. A lot of GDX options expired worthless. I have SILJ options for January that are probably going to cost me. On the flip side, each month I’ve been able to so side hustles with my recovery play…
Third – anticipate. I use people smarter than me with a lot of this, and try to play off of them. This recovery play was original research, and I’ve shared it out now every month for half a year. With this, I just sold a bunch of options this week and made $3,000 – which will pay for my basement flooring in my house. I am in 40% cash now after my sales and see one of two things happening soon. We are approaching the 18th coming up, which is around when they sandbag silver and gold ahead of options expirations.
Scenario 1 – the 50dma is at the top of the rail of the channel. You can’t really see it. We could hit this in the next day or two. IF we hit this, we could bounce down from it and go further down the channel. I’m expecting with options expirations coming up, there will be some sort of pull back, even to $22.70 where that line has held as resistance the last 2 weeks – it might become support. This scenario has silver falling until after options expiration. Gold is in the same ballpark usually. Miners get hurt during this time. There’s a “Brady not good line” at the bottom that hopefully acts as support. If it is crossed, further down we go.
Scenario 2 – As you can see, I have a “Brady good” line at about $23.15 and an Oliver “good line” at $24. IF we can punch through the Brady good line, he says he thinks the bottom is in. The problem with this he might not be taking into account is the options expiration for silver I think on the 28th. Usually a week or so leading into this, they start to smash metals. It’s POSSIBLE we hit $23.30, think we are good according to Brady, then get smashed over the head when the paper falls from the sky and prices drop. Hoping that drop holds at $22.70. IF that’s the case, I’d say look for Brady’s “good” line after 10/29. My next purchases may be on 10/29. While the low may not be completely in then, it’s usually close to the low. Take a look at this chart showing all of the smash downs over the last year plus.
So at 40% cash now, things might run up over the next week before the monthly beat down begins. I have some more options that are 2023 I might sell if it goes much higher.
You then see the recoveries every month, right after options expiration.
So with this, I’m looking at 10/29 to have my next real purchases. My bet is that prices may go up for a bit, but will come down – and then on 10/29 I’m going shopping for the next month. At some point we may break away from this down channel in silver – and if Oliver’s $24 line is crossed, this might be where I’m all in and when the monthly beat downs start, I only sell a little, and the beat downs are not that much. If you step back, it may look like a saw tooth pattern over several years time, but you might be in the know as to when to sell a little off the top and when to top off when things are low.
Stepping back this is silver going back 40 years. You can see in that green rectangle on the top 1/3rd is where we are now. Silver is in a sideways channel over a year now, but it has moved up to a new sector after sideways churn for 7 years.
What Oliver would contend is the “momentum structure” is looking good. That is, if you boil a cup and handle down to math, take a look at the RSI at the bottom. You see when the cup is going down, you see RSI usually in the bottom half. Momentum structures below zero.
When you see the sideways part of the cup, RSI is everywhere. These are great to play the chop. Buy at low RSI, sell at high RSI.
However, when you get to the right side of the cup, you are seeing RSI in the green and momentum structures in the green. We are seeing the arc forming now with silver similar to the arc formed from 1980-2011.
With gold, we are assuming we are in the handle of the cup and handle formed from 2011-2020, where all time highs were crossed. But we never got near the $50 high with silver.
What if silver is now working on forming the handle to the cup from 1980-2011, since then was the handle down, and now we are working on the handle up to $96? If so, it would suggest very violent up moves are coming. IF that’s the case, BE CAREFUL about playing my beat down game. Meaning, options expirations may end to the UP SIDE and not the beat down side in that scenario. In a sense, you’d buy 1 week out from options expiration, options would close to the upside, then you’d sell the say after expirations.
IF silver is actually in the handle after it took 30 years to form the cup, and the handle takes about 1/3 the time of the cup to form, it does stand to reason that in the next 6-18 months we could see that triple digit silver?
This is all ongoing after there are major green pushes in economies all around the world that want solar – but have no idea how hard it’s going to be for them to get the quantities they want at this price. I believe solar is the catalyst for the hockey stick coming. At the same time – I see the DXY heading down towards the lower rail of the ascending broadening wedge to potentially fall through support and head below 89.5 in the next 6 months. Oh – all of this during rising inflation and supply chain issues.
Leave a Reply