Getting Technical
Gold and Silver Are Even Weaker Than They Look
Despite a weak dollar, precious metals are still struggling. Here’s why they look to stay that way.
By Michael Kahn
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Last week, both gold and silver fell below their chart supports. For gold, it was the short-term low from May, but for silver, it was long-term support from last year. The trends are down, and save for short-term bounces, there is no technical reason to expect a big turnaround anytime soon.
There are two main reasons for this view. One is the trend itself. Gold, as represented by the SPDR Gold Shares exchange-traded fund (ticker: GLD) recently moved below the rising trendline that supported its rally from December (see Chart 1).
Chart 1
Chart 2
The second reason for a skeptical view is the metals’ performance as the U.S. dollar moves lower. Since gold, silver, and many other commodities are priced in dollars, a weak dollar should result in higher commodities prices, assuming other factors hold steady. But that hasn’t happened this year.
A chart of gold priced in euros shows the metal’s true weakness (see Chart 3). The current decline moved the market below last year’s major low as well as the trendline from 2015. While gold priced in euros is also oversold in the short term, the technical damage here is significant.
Chart 3
Chart 4
This is important because it tells us that optimistic investors who bought gold in May thinking it was improving have thrown in the towel. Demand is weak for this market, and that makes a rally less likely.
The caveat here is the same as it has been for other markets. Gold’s weakness—and stocks’ strength—has been predicated on an improving economy. Should Congress fail to reach agreements on health care and especially tax reform, conditions could change. Yet we cannot invest on what might happen. Right now, the charts tell us precious metals should remain weak.
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