It was a roller coaster ride of a week not only in Precious Metals but across asset classes with what seemingly has been one extreme volatility event after another. Over the past week, Jerome Powell reiterated the Fed's hawkishness, driving 2-year Treasury Yields to their highest since 2007, and the Yield Curve (2's vs. 10's) inverted the most since 1981. The terminal rate (the final interest rate hike level) rose 25 bps. to 5.65%, shocking the market and leaving the chances of a 50 bps rate hike at the March 22 meeting at 60%. The move in the terminal rate sent Gold diving $35/oz and Silver over $1.00, pushing the May contract below $20/oz!
Gold found support along with U.S. Treasuries, with the fall out of the Silicon Valley Bank and the demise of Silvergate, triggering speculation that credit event risk is rising. Looking forward, we can expect calls from regulators to stress-test banks and questions asking if there is a more significant contagion risk or if it is contained. Will money flow into safe-haven assets such as Gold, Silver, Treasuries, and flee risk assets? Early indications say yes, and that is why it is essential to own a long-term position that is highly liquid with nearly 23 hours/day of market access, such as futures contracts.
Daily Silver Chart
Daily Gold Chart
The technical backdrop in Gold shows a crucial double bottom at $1811/oz, and the market is well above the 200 DMA at $1785/oz. Stochastics are rising, and DMI+ is crossing back over DMI-. If the April Gold contract can close above $1865/oz, it should ignite the bulls and rally back to 1900. A close over 1910 should spark another wave of buying up to 1950-2000 with panic buying.
The near-term and long-term macroeconomic calendars have event-driven risks with U.S. Feb CPI on Tuesday, U.S. Feb PPI on Wednesday, U.S. Empire Manufacturing data, and Retail Sales. We have the ECB Meeting on Thursday, and on March 22, we have the next FOMC meeting.
We see value in systematically purchasing regular intervals of the 10-ounce Gold contract or 1000-ounce Silver contract. You can layer in over time and preposition for the next rally. One example with a $25,000 account size would be to focus on the December 2023 10-ounce Gold contract and use a dollar-cost average approach by purchasing 10 ounces of Gold at 1850/oz, 10 oz at 1800, and 10 oz at 1750 with a year-end target of $2100/oz.
If filled on all three contracts, your average price will be $1800/oz; therefore, every dollar move Gold makes on the three contracts will be $30 since you control 30 ounces. If the $2100/oz price objective is achieved by year-end, this will result in a gain of approximately $9,000 (30 oz times $300 rise). Traders should also consider proper risk management using a dollar-cost averaging approach, such as a hard stop on three contracts at $1700. If that were to occur under this scenario, it would likely result in a loss of $3,000.
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