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Gold, silver look bullish with significant breakout soon

AGAINST the backdrop of rising geopolitical tension between the US and Syria, and the ongoing trade war scare between the US and China, the price action in the safe haven asset classes such as gold and silver remains rather muted. However, we believe a significant breakout in gold and silver is about to happen, which should kickstart the next wave of buying.

We will focus on silver as it presents a better risk-reward proposition over gold as hinted by the gold/silver ratio. The gold/silver ratio is currently trading at an extreme high of 80. The gold/silver ratio measures the number of ounces of silver one ounce of gold can buy. For instance, the current ratio of 80 suggests that an ounce of gold is equivalent to 80 ounces of silver. For the past 20 years, the gold/silver ratio has only traded above that level on three occasions where sharp mean reversion eventually took over. The 30-year historical average of the gold/silver ratio is around 66. In other words, referencing the average gold/silver ratio of 66 and the current gold price of US$1,342 would translate into a silver price of US$20.30 (US$1,342/66). Hence, it is a matter of time before we get a stronger rally in silver.

On the price action front, silver has been lagging behind gold. Year-to-date performance of gold is +3.1 per cent while silver is only up +1.5 per cent. Silver has been consolidating in a tight range for the past 11 weeks with US$17.00 acting as the range high while US$16.20 acted as the range low - shown by the highlighted region in the chart.

However, some signs of life appeared recently after silver broke above the US$17.00 range high forcefully on April 18. With the amount of energy being stored up over the past 11 weeks of consolidation, we believe this rally is only beginning, and a stronger move higher is about to happen. The bulls should be aiming for the US$17.70 resistance area next followed by US$18.65 after this bullish breakout. Moreover, the current environment of heightened uncertainties from geopolitical fears and a weakening US dollar trend should also act as a tailwind for the safe haven assets.

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From a longer-term perspective, the 200-month moving average has been acting as a solid floor since November 2016, preventing silver from falling lower. In total, the 200-month moving average succeeded in halting the selloff for past 13 occasions, justifying the importance of that level. Keep a close lookout for the 200-month moving average as that will dictate if silver turns into an uptrend or not. More specifically, the 200-month moving average is coincidentally at the US$16.20 range low level as well, making that level a stronger base. Hence, we expect limited downside in silver with the US$16.20 range low and 200-month moving average acting as the solid base.

On the flip side, with silver currently breaking out of the US$17.00 range high, gold should also follow the lead and break above the US$1,360 range high soon. Next target for gold after the breakout is the US$1,391 resistance area followed by US$1,433. All in all, the near-term price action in both silver and gold looks bullish.

  • The writer is chief technical strategist, Phillip Securities Research.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.