Ying and Yang (the Gold and Silver Set-Up)

No, this is not a post about some new Chinese law firm.
Instead, it’s just an update on the gold and silver markets which, while refusing to go further down, aren’t making much progress to the upside, either.

From Craig Hemke, TFMetalsReport:

Today’s message: A few more slightly positive US economic datapoints and these are likely enough to make a December FF rate hike a fait accompli.

Again, though…and I can’t stress this enough…we have traced out a pattern that is remarkably similar to last October and November in the run up to the most recent FF rate hike. And what happened beginning the very next day? Well, by now you know the story.

The week of the October 2o15 FOMC produced a high trade in the Dec15 contract of $1183. As the Fedlines were digested later that week, it became clear that the Fed was going to raise the FF rate at the December 2015 meeting come hell or high water.  And they did.

However, take a close look at how gold traded in the days and weeks between the Oct15 FOMC and the December rate hike.

Price fell from $1180 to $1050 in about five weeks but note that it bottomed well in advance of the actual “news” of the FF rate hike. This 10+% drop was fueled by a near panic level liquidation of the Specs at the Comex.

2016 Silver Eagles SaleHow bad was it? From the CoT survey of 10/27/15, just one day before that fateful FOMC and Fedlines, the Large Specs in gold were NET long more than 157,000 contracts while the Commercials were NET short nearly 166,000.

Just five weeks later, the NET position of the Large Specs was down to only 10,000 contracts with the Commercial position reaching an alltime low of just 2,911 contracts NET short. We even speculated at the time that there were some days, intraweek, where the Gold Commercials were actually and historically NET LONG.

Well now compare last autumn to our current situation.

Just as back then, a FF rate hike is a near certainty at the FOMC in December. However, as you know, the anticipatory move in gold began a few weeks ago with the beatdown and purposeful break of both the 50-day and 100-day moving averages in late September.

Take a look at the current chart and compare it to the one posted above:

In 2015, we had the October FOMC and then two stout down weeks. Before price turned, we slogged through 5-6 weeks of consolidation and CoT improvement before the blast higher began.

In 2016, we had the September FOMC and then two stout down weeks. Price is attempting to bottom and turn while the CoT improves, but it doesn’t seem ready just yet to begin moving consistently higher.

In 2015, the turn in gold began once the actual rate hike took place. The rate hike and forecast for 3 or 4 more in 2016 led to dollar strength, which led to Chinese devaluations, which led to emerging market crises, which led to equity selloffs and the gold price was already 5-10% off its lows by late January before the real fun began with the USDJPY falling 10% in early February.

Are we headed down that same path again? It certainly appears so as the first major salvos of Chinese yuan devaluation were fired last week: http://www.zerohedge.com/news/2016-10-20/dear-janet-china-devalues-most-august-yuan-tumbles-lowest-sept-2010

And, just as in 2015, the CoT is certainly undergoing a makeover, too. From the survey of 9/27/16, the Large Specs in gold were NET long 292,000 contracts while the Commercials were NET short 325,000. As of last Tuesday and just three weeks later, the Large Specs were down to 180,000 NET long for a reduction of 38% and the Commercials were NET short 203,000. To be sure, these are still hefty positions but much more “bullish” than the levels seen through the past summer.

And now check the full long-term chart. You can see again the similarities between now and last fall. Also be sure to note, however, that the trend has clearly changed and that price is pointed higher.

So while we must still deal with the consolidation for a while longer…the Ying and Yang mentioned in the title of this post…it is clear to me that the trend remains higher and that the now-expected FOMC FF rate hike will be simply another “sell-the-rumor, buy-the-news” type of event for gold and silver.

This current period of relative quiet should be used to prepare for the next leg UP, not some sort of new bear market where paper prices are sharply falling. Use your time wisely and continue to prepare/stack accordingly.

TF

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