Nov 12, 2019
With the expected price pullback underway, what can we expect for the remainder of the month and into year-end? Will the price action continue to resemble 2010, or will it play out more like 2016 instead?
As we've discussed each of the past two weeks, the current selloff/pullback in COMEX gold and silver is as unsurprising as it was unavoidable. The COMEX market-making Banks have driven total gold open interest to new all-time highs above 700,000 contracts, and with the vast majority of these contracts being found in the current front-month of Dec19, a price drop driven by Speculator liquidation was almost inevitable. And here we are.
In our weekly post from two weeks ago, we projected that this contract "expiration" and liquidation would likely lead to lower prices in the short term. See this link, from which the snippet below was taken: https://www.sprottmoney.com/Blog/comex-gold-ahead-...
Prices have indeed taken out the $1470 level and the 100-day moving average in the days since. And with the Dec19 contract going off the board (and option expiration, too) in two weeks, you should probably expect the selling pressure to continue. However, with daily momentum indicators already deeply oversold, I do not expect the sharp "waterfall" decline to which we've all grown accustomed over the years. Instead, a steady erosion is likely, moving price toward that $1440 level and perhaps even the 200-day moving average.
However, once the Dec19 contract rollover ends, I expect the selling pressure to abate. And then what? To answer that question, you need to answer this question first:
• Is the current period of 2019-2020 similar to 2010-2011 or 2016-2017?
We've written about the idea of 2019 being like 2010 on multiple occasions this year already. In fact, it was understanding the similarities to 2010 that led us, in January, to issue the audacious forecast of "the best year for the precious metals since 2010" . At the time, this was a rather contrarian and bold forecast for the simple reason that gold prices hadn't exceeded $1370 in over five years. Here are two links that pretty well laid out the rationale for this year's rally:
So, again, getting back to the central question at present: From here, do we continue like it's 2010-2011 or will precious metal prices fall back as they did in 2016-2017?
Fortunately, for all of us with a vested interest in gold and silver, finding the answer to this question is really quite simple.
2010: The U.S. and global economies continued to slow. After the initial "green shot" optimism that followed QE1, U.S. GDP growth ground to a halt, falling from +3.1% in 2010Q2 to contraction and recession in 2010Q4 and 2011Q1. The Fed responded with QE2 in November of 2010, and the impact of this debt monetization and currency devaluation was lower interest rates and higher PM prices.
2016: The U.S. and global economies began to recover, particularly after the U.S. presidential election and the sudden return of expectations for a stronger US$ and rising interest rates. The U.S. Fed embarked on a course of "Quantitative Tightening" that continued through early 2019.
2019: The U.S. and global economies continue to slow. After posting growth of +3.1% in 2019Q1 and +2.0% in 2019Q2, the first guess for Q3 came in at +1.9%, and the current estimates for Q4 range from just +0.7% to +1.0%. This slowing growth, combined with an ongoing Bank liquidity shortage, has prompted The Fed to halt "QT" and restart "QE" to the tune of $60B/month in direct debt monetization through next June, at a minimum.
With it being quite clear that the present day is more analogous to 2010 than 2016, making a forecast for year-end and 2020Q1 is relatively stress-free.
Expect prices to continue to drift sideways/lower for the remainder of November and through the Dec19 expirations. From there, expect prices to rebound into year-end, finishing 2019 very near where we forecast them back in January—just below major resistance of $1480-$1520 in COMEX gold and near $18 in COMEX silver—and posting the best annual gains since 2010.
And then, with the new year upon us and deteriorating economic conditions bringing even lower interest rates, both COMEX metals will rally in 2020Q1. At this time, I expect COMEX gold to reach toward $1650 and COMEX silver to trade above $20 sometime before Saint Patrick's Day. After that? Well, you'll just have to check back in with us in January when we issue our full 2020 forecast.