by Craig Hemke, Sprott Money:
Gold and Silver Price Recovery: What to Expect Next
After steep declines that led to sharply oversold conditions, the prices of gold and silver are bouncing as the new week begins. So is that it? Is the worst over, or should we expect more price weakness before the end of the month? Let’s explore that today.
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First of all, the Monday rally is being brought about by news, short-covering, and profit-taking. Very sharp and brief rallies are often seen during periods of price pullback, and today’s moves are not unexpected. In last week’s column, we discussed possible price drops to $2560 in COMEX gold and $30.50 in COMEX silver. Not coincidentally, those levels are very close to where prices bottomed on Thursday and Friday.
Understanding Gold’s Oversold Conditions and RSI Levels
The sharp and brief counter-trend rallies mentioned above often come about due to deeply oversold conditions. After relentless and seemingly endless selling from November 6 through November 15, both COMEX gold and silver reached those oversold levels with the daily Relative Strength Index for COMEX gold falling to near 30 late last week.
Gold – Daily Candlestick Chart
The result? Some concerning news out of Ukraine over the weekend started a safe-haven bid for the precious metals as soon as trading resumed Sunday evening. The buying continued in China and London, and, once COMEX trading began, some short-covering led to further gains.
Gold Futures
Impact of the U.S. Dollar Index on COMEX Gold and Silver
But what happens next? And how will we be able to determine whether the lows are in or if this is just a bounce before a possible double bottom next week? First of all, keep an eye on the U.S. dollar index. Just as COMEX gold got deeply oversold last week, the dollar index got deeply overbought, with its highest daily RSI in over a year. It ran into resistance at the 107 level, and now the waiting begins. If it blasts through 107, then the COMEX metals are almost certain to pull back again. If, however, more selling appears and the index falls below 105.50, we should see the COMEX metals find more solid footing for a December rally. As such, let’s watch the dollar index very closely this week and next.
