2019: Charts suggest a positive outlook

Gold-silver ratio indicates that silver could outperform the yellow metal

After posting a strong rally for two consecutive years (2016 and 2017), gold prices ended in the red in 2018. Though the yellow metal began the year on a positive note, it failed to sustain higher. The global spot prices were broadly range-bound between $1,300 and $1,370 per ounce in the first four months.

Subsequently, prices declined below $1,300 and tumbled to make a low of $1,160 per ounce in August. A strong surge in the US dollar index from around 91 to 97 over this period dragged gold prices sharply lower. However, the yellow metal managed to bounce back from October, recovering most of the loss, and closed at $1,278 per ounce, down 2 per cent for the year. The yellow metal has begun the new year on a positive note and is currently trading at $1,285 per ounce.

Silver, on the other hand, underperformed gold last year. The global spot silver prices tumbled 9 per cent and closed the year at $15.38 per ounce.

So, what’s in store for gold and silver in 2019?

Gold-silver ratio

The gold-silver ratio (price of gold divided by price of silver per ounce) is used to forecast the direction of gold and silver prices. The ratio, and the prices of gold and silver have an inverse correlation. The ratio is currently near 82; it is likely to fall to 78 in the coming months. A break below 78 can drag the ratio lower to 75.

A fall in the ratio usually implies a rally in gold and silver prices. This leaves the possibility of gold surging to $1,350 and $1,380 levels and silver rallying to over $17 per ounce from the current levels. It also indicates that silver may outperform gold in the coming months.

Long positions to build up

Data from the US Commodity Futures Trading Commission (CFTC) indicate strong short covering over the past several weeks. It also indicates that fresh long positions are likely to build up in the coming months. The net positions (long minus short positions) of non-commercial traders in COMEX gold futures have increased from -38,175 in October to 75,960 as of December 18, 2018. The long-term trend suggests that the net positions can increase to over 2,50,000 in the coming months, indicating a rally in gold prices.

Gold outlook

The global spot gold ($1,285 per ounce) formed a strong base around $1,200 between August and October last year. The region between $1,230 and $1,200 is likely to limit the downside in the short term.

The near-term resistance is in the $1,290-1,300 range. A strong break above $1,300 can take gold prices higher to $1,360 or $1,370. A further break above $1,370 will see prices inching higher to $1,390. The levels of $1,370 and $1,390 are crucial resistances for gold. Whether gold breaks above $1,390 or not will determine the direction of the move thereafter.

If gold manages to breach $1,390, it can then target $1,450. But a pull-back from the $1,370-1,390 region can drag prices to $1,300 or even lower thereafter.

Silver outlook

After a prolonged consolidation between $14 and $15 since September, the global spot silver ($15.7 per ounce) has risen above $15 in December. The region between $15 and $14.9 will now act as a strong support. As long as silver trades above this support zone, a rally to $16.5 is likely in the short term. A strong break above $16.5 will take prices to $17.3 and $17.5.

The bullish outlook will get negated only if silver declines below $14.9. In such a scenario, the prices can fall to $14 and $13.8 .

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