Gold and Silver Ready to Shimmer?

JC Parets
November 17, 2021

Precious metals have been bearing the brunt of being the most underperforming asset class for over a year now. While we saw stocks and commodities rally, precious metals were moving sideways or undergoing correction. And this was regardless of where the US Dollar was headed!

But there's a movement coming through in the precious metals, which is important to observe. We are here to do just that.

Traditionally speaking, the Dollar and Gold have moved in the opposite direction. They have an inverse relationship so to speak, and that is depicted by the chart below.

As can be seen in the image below, the US Dollar and Gold have a strong negative correlation. This is evidenced by the correlation coefficient in the bottom pane. While there are times when they move in the same direction, the traditional relationship catches up pretty soon.

Notice how when the indicator contracts, the negative correlation reduces. But the inverse relationship persists beyond short bursts of positivity.

Click on the chart to zoom in.

Now let's take a look at Gold relative to Nifty 50. We can see in the chart below that the ratio is turning away from the same point as it did in 2018. Now, what was it that happened in 2018? Risk-on assets peaked across the globe. This means that Gold began outperforming the stock market since the sentiment turned cautious.

The ratio then rolled over in April 2020, when the risk-on ratios started turning positive, and risk-off assets peaked.

So where are we now? We're at a point where the yellow metal is displaying strength despite a strong dollar, which is definitely an important aspect to track. The fact that the Gold/Nifty50 is bouncing from the 2018 lows also adds weight to the strength in gold.

It is important to note here that Gold and stocks don't always move in the opposite directions. It is the outperformance that we are interested in: relative strength.

In terms of levels, what are we talking about then?

In the week gone by, the price in Gold managed to make a new 5-month high. Yup, we have a 5-month high, folks! It's been a while since the shiny metals have made it to a post talking about their strength. And here we are! Notice that the price has moved out of the downward sloping channel.

So what are the levels we're tracking? In INR terms, the immediate support that we're looking at is placed at 47,525. From here on, if the yellow metal marches on, 50,700 and 52,650 are the next targets in line.

What about Silver, then?

Silver is now trading at a 4-month high! After bouncing back from the support level of 62,000 the price has moved higher. This is a sign of growing strength. With this bounce in price, the next level to track would be 72,570, followed by the all-time high at 77,950.

The absolute bullish scenario for both metals becomes strengthened only after they cross their respective all-time highs, but the current move is something to keep on the radar.

It is important to make note of the price when it stops moving lower/higher. It indicates that there might be a change in trend. After all, the price has to start moving in the opposite direction of the underlying trend, for a trend reversal to play out.

What are your views on Gold and Silver?

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

Filed Under