This article was written exclusively for Investing.com.
- Gold and silver consolidating since the early August peaks
- Another push lower before the end of 2020 would not surprise
- Bullish reason #1: Central bank liquidity
- Bullish reason #2: Government stimulus
- Bullish reasons #3: The stock of money
For the gold and silver markets, 2020 has been an exciting year. After falling to lows of $1450.90 and $11.74 per ounce in March as risk-off conditions gripped markets across all asset classes, both precious metals posted impressive rallies. While gold fell to the lowest price in 2020, it held the November 2019 low on the continuous futures contract. Gold proceeded to move to $2063, a record high, in early August.
Meanwhile, silver’s low was a level not seen since 2009 as risk-off punished the volatile precious metal. By early August, silver traded to its highest price since 2013 when the precious metal peaked at $29.915, 155% above the March low in only four months.
Since August, gold and silver have corrected lower. At the end of last week, gold was sitting around the $1951 level, and silver was trading just over $25.65 per ounce after significant rallies on November 5.
The final months of the year tend to be a weak period for precious metals. The second wave of coronavirus in Europe and the US could lead to the second chapter for risk-off conditions in 2020. However, any selling over the coming weeks would likely set up a golden opportunity for gold and silver in 2021.
Gold and silver consolidating since the early August peaks
After trading to a high of $2089.20 on August 7 and putting in a bearish reversal on that day, COMEX December gold futures corrected and has been in a consolidation pattern over the past three months.
Source, all charts: CQG
As the chart above shows, the yellow metal was trading around the $1950 level at the end of last week. Open interest has been steady over the past months and was at the 568,370-contract level on November 5. Price momentum and relative strength indicators were rising above neutral readings.
Daily historical volatility was sitting at the 17.47% level. Short-term technical support stands at $1851, the September 24 low. Resistance is at $2001.20, $2024.60, and $2,089.20 per ounce.
The daily chart of COMEX December silver futures illustrates that the high came on August 7 at $30.19 per ounce. Silver was at the $25.70 level on November 6. The total number of open long and short positions was sitting quietly at 157,951 contracts. Price momentum and relative strength metrics were rising above neutral conditions.
The measure of daily historical volatility was around 43%. Technical support is at the September 24 low of $21.81 per ounce. Resistance sits at $29.235 and $30.19.
Gold and silver were moving higher out of consolidation patterns at the end of the first week of November.
Another push lower before the end of 2020 would not surprise
The final months of the year tend to be a bearish period for precious metals. In 2015, gold and silver hit respective lower of $1046.20 and $13.635 on the continuous contracts. The 2015 low in gold still stands as a significant technical bottom. Silver’s late 2015 was the same until March 2020 when the precious metal experienced a short-term spike to the downside during risk-off conditions caused by the global pandemic.
Over the past years, the end of the year has traditionally been a weak period for gold and silver prices. The second wave of coronavirus and the metals’ seasonal trading patterns could lead to price weakness before the end of 2020.
Meanwhile, the prospects for 2021 and beyond remain bullish for the gold and silver markets. Any price weakness over the coming weeks could be another buying opportunity for the precious metals.
Bullish reason #1: Central bank liquidity
Central banks are pulling out all the stops and using all of the tools at their disposal to counter the impact of the global pandemic. US short-term interest rates are sitting at zero percent. The Federal Reserve has told markets to expect the Fed Funds rate to remain at zero percent until 2023.
Quantitative easing programs are keeping interest rates low further out along the yield curve. Short-term rates in Europe and Japan remain in negative territory. The bottom line is that the world’s central banks will continue to flood the financial system with liquidity, which increases the money supply, encourages borrowing and spending, and inhibits saving.
Gold and silver tend to thrive in a low interest rate environment as they compete with other assets for investment capital. The precious metals have a long history as currencies, so the lack of yield on fiat currencies supports gold and silver prices. Moreover, the Fed has increased its inflation target from 2% to an average of 2%. Encouraging rising inflationary pressures is bullish for the two precious metals.
Bullish reason #2: Government stimulus
From June through September 2008, the US Treasury borrowed a record $530 billion to fund stimulus following the global financial crisis. In May 2020, they borrowed $3 trillion. The second wave of the virus will cause the Treasury to borrow trillions more over the coming weeks and months.
Bailouts for businesses, aid and helicopter funds for individuals, and other stimulus measures increase the deficit and money supply. The tidal wave of stimulus erodes the purchasing power of money, which is inflationary and highly supportive of gold and silver prices. The election results point to another massive stimulus package soon.
Bullish reason #3: The stock of money
Liquidity and stimulus programs can be initiated with the push of a button by central banks and governments. Increasing the gold and silver stockpiles can only occur by extracting the metals from the earth’s crust.
The global pandemic of 2020 is an ongoing watershed event. Protecting people from the virus entails social distancing and other measures that weigh on the global economy. Countering COVID-19 will involve a continuation of programs that weigh on the value of the fiat currencies that derive value from only the full faith and credit in the governments that issue the legal tender.
Long before there were dollars, euros, yen, pounds, and all fiat currencies, gold and silver were means of exchange. Central banks worldwide validate gold’s role in the financial system by holding the precious metal as an integral part of their foreign exchange reserves.
The economic impact of the pandemic will long outlive the coronavirus. The actions by central banks and governments will continue to support gains in gold and silver markets.
Buying the two metals during periods of price weakness is likely to be the optimal approach. If the price action on gold and silver markets from 2008 through 2011 is a model for 2020 and the years ahead, higher prices are on the horizon.
While the financial crisis a dozen years ago was far different than the pandemic, the approach to stabilizing economic conditions is the same. Albert Einstein said that the definition of insanity is doing the same thing repeatedly and expecting a different result. Gold and silver prices exploded from 2008 and reached highs in 2011. We should expect a similar result over the coming months and years.