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23.03.2022 11:37 PM
Gold and silver - prospects of the precious metals market

Hello, dear colleagues!

Three weeks have passed since the last review of the precious metals market, and who is still there. In fairness, it must be admitted that precious metals still attempted to grow, updated the local high located at 1976.50, reached a historical high at 2078, but, failing to overcome it, they returned to the level of $1,900 per troy ounce. This situation has become a disappointment for those investors who have already bought gold and assumed its further growth. However, traders were able to take the profit, because such a development of events was well calculated using technical methods, and in this article I will again try to analyze the prospects for the price of precious metals from the point of view of a multifactorial analysis of financial markets.

To begin with, let's look at how the supply and demand in the gold market have changed in the context of investments in exchange-traded funds. After the rapid increase in demand from North American investors, which we saw in January, in February the activity of fans of "paper gold" decreased slightly. Investors from the United States purchased 21.3 tons, which is significantly less than they bought a month earlier. Demand in Europe amounted to 21.4 tons and was the highest since October 2020. Asian investors left the market for the second consecutive month and sold 7.4 tons of gold. According to the aggregate demand, international investors purchased 35.3 tons in exchange-traded funds focused on physical gold, which, although it pushed the price to a historical high, did not allow it to go further, since the volume of purchases was decreasing by January (Fig.1).

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Fig.1: International investments in exchange-traded funds based on gold - Gold ETF

At the same time, a small correction experienced by gold may well be a continuation of the trend, but for this, let's look at a number of other factors, in particular supply and demand in futures contracts of the CME-COMEX exchange. First of all, let's pay attention to the indicator of supply and demand, the so-called Open Interest, which increased by more than a third from February 1 to March 15 and amounted to 850,000 contracts, which was the highest value in a year and a half. The growth of OI indicators suggests that the demand for gold futures and options contracts is increasing, and this is the potential for further growth.

In contrast, the opposite factor should be taken into account - the calendar closing of options and futures contracts. The nearest option contract in gold, traded on the CME-COMEX exchange, closes on March 28, while the point of highest pain for option buyers is located at $1,885 per troy ounce, which is close to the current gold futures price of 1920 (Fig.2).

The point of maximum pain - Max Pain - is the level at which buyers of options will receive the greatest losses, and sellers of options, on the contrary, will receive the maximum profit from their transactions.

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Fig: Distribution of strikes in the OGJ2 Gold option contract

Thus, the analysis of traders' positions, conducted from the point of view of assessing supply and demand, shows us that at the current moment we have an ideal illustration of how the interest of long-term investors faces resistance from large speculators who do not want to incur losses from a rapid price increase. After the current April contract closes on the exchange, the June contract will be the next in terms of liquidity. In this connection, it can be assumed that the increase in the price of gold may soon resume.

We saw a clear example of this approach last week in the price of oil. Then, just a few days before the closing of the April option contract, the price of oil fell by more than a third, but immediately resumed growth as soon as the settlement on options and futures was made. In this regard, traders trading on the oil, gold and other commodities market must take into account the closing date of options and futures in their transactions. The closing date of a particular contract can be found on the CME exchange by looking at the specification or calendar.

After we have understood the general - fundamental direction of the price - let's look at the technical picture in gold with a perspective for one to three months (Fig.3).

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Fig.3: Technical analysis of the gold price

As follows from Chart 3, in February 2022, the price of gold broke the multi-year range and reached historical highs, after which a correction occurred. At the same time, it seems to me that in the next few weeks gold will form a reversal model from the range of 1880-1920, where traders and investors will be able to buy it with a target of 2070 and 2500, setting orders to fix losses below the value of 1800. This will allow traders to have profit and risk ratios of about 2 to 1, which is an acceptable level for any investment and trading system.

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Fig.4: Technical picture of the silver price

Silver, like gold, overcame strong resistance in February and reached the level of 27.50, after which it returned to the range of 24.75-25.25, where, in my opinion, it will form a reversal pattern with subsequent growth to the levels of 27.50 and 30.00.

In the current situation, traders should not rush to make long positions and it is better to wait for a more distinct trading model that allows you to place a stop order with a profit and risk ratio of at least 2 to 1, based on the price movement to the first target, located at 27.50.

As usual, the market does not set us easy tasks, so be careful, follow the rules of money management when opening your positions.

Daniel Adler,
الخبير التحليلي لدى شركة إنستافوركس
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