Gary Wagner: A Correction is Coming for Gold, But This is The Level to Watch

Key Concepts

• Gold and Silver Price Surge: Significant and rapid increases in the prices of gold and silver.
• Silver Squeeze: A situation where demand for physical silver significantly outstrips available supply, driving up prices.
• Backwardization: A market condition where the spot price of a commodity is higher than its futures price.
• Silver-to-Gold Ratio: The ratio of the price of silver to the price of gold, indicating their relative performance.
• US Dollar Index (DXY): A measure of the value of the US dollar relative to a basket of foreign currencies.
• Technical Analysis: The study of past market data, primarily price and volume, to forecast future price movements.
• Moving Averages (20-day and 50-day): Technical indicators used to identify trends and potential support/resistance levels.
• Bullish Cross/Dead Cross: Crossovers of short-term and long-term moving averages that signal potential upward or downward price movements, respectively.
• Parabolic Move: A rapid and steep price increase that forms a parabolic curve on a chart.
• Speculative Money: Investment driven by anticipation of short-term price changes rather than fundamental value.
• Dollarization: The process by which a country adopts the US dollar as its primary currency.
• Reserve Asset: An asset held by central banks to back their currency or for international transactions.
• Physical Demand: Demand for the actual commodity, as opposed to financial instruments.
• Arbitrage: The simultaneous purchase and sale of an asset in different markets to profit from tiny differences in the asset's listing price.
• Distribution vs. Continuation: Technical analysis terms describing patterns that suggest a market is topping out (distribution) or continuing its trend (continuation).
• Dollar Cost Averaging: Investing a fixed amount of money at regular intervals, regardless of the asset's price.
• Intrinsic Value: The inherent worth of an asset, independent of its market price.
• Fiat Currency: Currency that a government has declared to be legal tender, but it is not backed by a physical commodity.
• Inflationary Pressure: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Market Divergence and Precious Metals Rally

The global markets are experiencing a remarkable and historically significant divergence. Gold has surged by an incredible 9.5% in just three weeks, with futures adding over $360 to trade above $41.50 per ounce. Simultaneously, silver futures have broken through the historic $50 resistance level, a cap that has held since the highs of 1980 and 2011. Spot silver is trading above $51.

This surge in precious metals is occurring despite an unexpected rally in the US dollar index (DXY), which has gained over 2% this month, reaching just over 99. This move is attributed to significant weakness in the euro and Japanese yen. The breakdown in the typical inverse correlation between the dollar and precious metals necessitates a deeper analysis.

Silver: The Squeeze and Technical Breakout

Gary Wagner, technical analyst at Thegoldforecast.com, discusses the unprecedented move in silver. He notes that after decades of failed attempts, silver has broken through the $50 range, leading to a collapse in the silver-to-gold ratio.

Technical Analysis of Silver:

• Spot vs. Futures: Spot silver is trading above front-month futures, a reversal of normal structure. This backwardization, where the spot price is higher than the futures price, strongly implies a "silver squeeze."
• Physical Tightness: This scenario suggests that demand is far exceeding physical stock, throwing the futures market off balance.
• Volume Spike: Volume has been enormous, with spot volumes in Asia up 40% week-over-week, led by Shanghai and Mumbai. Refiners are reporting premium bids over $120 per ounce above COMEX settlements.
• Forecast: Wagner forecasts silver to reach $55 to $58 by the end of the year or the first quarter of next year.

Discussion on Silver Squeeze:

• The physical trader is effectively dictating price over financial contracts.
• If the arbitrage between spot and futures disappears quickly, it indicates that liquidity is still intact.
• Sustained backwardization is needed to confirm a true shift in price discovery. Traders will arbitrage the differential, tightening the spread.

Gold: Parabolic Rise and Technical Confirmation

The discussion then shifts to gold, which has seen a significant rally of over $360 since late September.

Technical Analysis of Gold:

• Parabolic Move: Gold went parabolic beginning on Tuesday, August 19th.
• Moving Averages:
  • A 20-day simple moving average (blue line) and a 50-day simple moving average (green line) are used.
  • A bullish trend is indicated when pricing is above the 50-day moving average.
  • For most of the year, gold has witnessed real bullish sentiment, with the 50-day moving average below the 20-day.
  • The widening distance between the two moving averages indicates increasing bullishness.
• Bullish Cross: The alignment of the moving averages is proper for a full bullish demeanor. A "bullish cross" occurs when the blue line crosses above the green line.
• Forecast: Wagner personally believes gold is headed to $4,300 by the end of the year.

Arguments for Gold's Strength:

• Speculative Money: While RSI readings are near overbought territory, and many are calling for $5,000 gold, Wagner expresses caution about excessive speculative money entering the market, as this can signal a potential top. However, he emphasizes that if fundamentals are overwhelmingly bullish, speculative money may not change the dynamics.
• Fundamentals: The core argument for gold's continued rise is its role as a safe-haven asset, especially if the dollar continues to lose value in terms of buying power due to inflation.
• Consolidation and Base Formation: Gold has shown consolidation patterns, forming bases with tight ranges before popping up again. This suggests continued upside room.
• Central Bank Accumulation: Central banks have been making record sovereign purchases of gold. This trend of de-dollarization and seeking a neutral reserve asset is happening outside the futures market.
  • Central banks accumulate and hold gold, diminishing supply and accelerating the upside move.
  • China is a significant purchaser, and this gold will remain in their reserves, not for speculation.
  • This tightening of supply is a very positive factor for gold.

Distinguishing Continuation from Topping Patterns:

• Volume Behavior: Brisk and good volume suggests stable or growing demand.
• Candlestick Structure: Not explicitly detailed, but implied to be part of the analysis.
• Moving Average Slope: The widening gap between moving averages indicates continuation.

The Dollar's Role and Risk Management

The conversation addresses the complex relationship between the rising US dollar and the rally in precious metals.

Dollar-Gold/Silver Relationship:

• Typically, there is an inverse relationship: dollar weakness leads to precious metals strength, and dollar strength creates headwinds for metals.
• However, the dollar has moved from 96.69 to 99.46, and gold and silver have continued to move up. This indicates that metals have had to overcome dollar strength just to break even.
• This scenario suggests that the underlying fundamentals driving precious metals are strong enough to counteract dollar strength.

Risk Management for Investors:

• Physical Accumulation: Investors should have built a base and are now adding to it at a more expensive price (dollar cost averaging to the upside).
• Holding Value: The price of gold or silver doesn't matter if you're holding; it only matters when buying and liquidating. The intrinsic value of physical metal remains.
• Intrinsic Value vs. Fiat Currency: Gold has intrinsic value, while fiat currencies are backed by faith in government. Over time, fiat currencies lose buying power due to inflation, requiring more currency to purchase the same amount of goods.
• Trees Don't Grow to the Sky: Parabolic moves don't last forever. A correction is expected, but it doesn't necessarily mean the rally is over.
• Support Levels: For gold, levels like 3890 are critical support. If gold remains above this level, even with down days, it hasn't caused technical chart damage.

Conclusion and Key Takeaways

The current market environment is characterized by a powerful physical demand for gold and silver, driving significant price appreciation. This demand is strong enough to defy a rising US dollar, signaling deep systemic risk that is repricing the entire market.

Key Takeaways:

• Record Volume and Collapsing Gold-to-Silver Ratio: These indicators point to a rally driven by powerful physical demand.
• Silver Squeeze: Backwardization in silver futures suggests extreme physical tightness.
• Gold's Parabolic Rise: Supported by technical indicators and fundamental factors like central bank accumulation and inflation concerns.
• Dollar Strength as Headwinds: Precious metals are overcoming dollar strength, highlighting their underlying momentum.
• Long-Term Bullish Outlook: Despite potential short-term corrections, the long-term outlook for gold and silver remains bullish due to intrinsic value and the debasement of fiat currencies.
• Forecasts: $4,300 for gold by year-end and $55-$58 for silver are considered achievable targets.