Go(ld) for Silver
Written on 2024-11-02, first published on 2024-11-05
Markets in focus
The normalization of policy rates and continued geopolitical tensions have pushed gold to new all-time highs this year. Through the lens of other currencies, such as the Yen, this surge in gold prices becomes even more pronounced.
Other precious metals have been relatively muted in comparison to gold’s rally. These key ratios, such as the Gold-to-Silver and Gold-to-Platinum, are trading at key resistance levels. Reversals of these ratios could provide bullish signals for these relatively muted precious metals.
Silver prices have decisively broken above the overhead resistance that had repeatedly capped its advances since May. Should this level become the new support level, it would provide significant strength for silver prices.
On the other hand, Platinum prices have been coiling and nearing the apex of a long-term symmetric triangle. Following the lead of gold and silver, a break above the upper trend line sets the stage for a rally in Platinum prices.
The recent developments in Japan’s election have resulted in a failed retest of our previously identified Diamond Top pattern, further confirming the onset of a bearish reversal.
Our market views
As we approach a crucial period for investors globally, two key events are capturing attention: the U.S. presidential election and Japan’s unstable political landscape. In the final stretch leading up to the November 5 election, betting odds indicate Donald Trump is ahead of Kamala Harris. Financial markets have reacted accordingly, with some participants selling U.S. bonds and buying dollars in anticipation that a Trump administration would spur inflation. Others have opted to invest in Asian financial markets, particularly China, which exhibit a lower correlation with global asset movements. While the outcome of the U.S. election is poised to shape equity and fixed-income markets differently, we aim to explore precious metals—an area that has not been in the spotlight for some time but possesses strong upside potential regardless of which party takes office.
Notably, 2024 has been a remarkable year for gold buyers. The precious metal has been breaking into new all-time highs, a trend even more pronounced when expressed in other currencies such as the yen. This surge results from a confluence of factors: the shift toward normalization of policy rates by major central banks and escalating geopolitical tensions have enhanced gold’s appeal as both an investment vehicle and a safe-haven asset. Historically, during U.S. elections, gold often experiences a surge in anticipation of economic uncertainty but tends to normalize swiftly post-election. While existing volatility stemming from the election may wane, the ongoing normalization of policy rates and geopolitical tensions are likely to persist, providing fundamental support for gold regardless of election outcomes.
Should Trump return to office, renewed inflationary pressures from proposed tariffs and fiscal stimulus could drive demand for gold higher as a hedge against inflation. As during his previous term, this could trigger a “super-cycle” in gold prices. Conversely, while Harris’s administration might adopt less aggressive measures, her support for increased government spending on social programs, infrastructure, and climate initiatives could lead to higher budget deficits. This scenario would likely weaken the dollar and elevate inflation expectations. Despite differing approaches from either party, both scenarios point toward a weakening US dollar and rising inflation—common denominators that fundamentally support gold prices.
While gold has dominated headlines for an extended period, other precious metals like silver and platinum have been overlooked by markets. This oversight is understandable given gold’s long-standing reputation as a store of value during economic uncertainty or inflationary periods. Furthermore, precious metals, such as silver and platinum, have substantial industrial applications in sync with economic cycles, making them less ideal as safe-haven assets. However, financial markets appear blindsided by their industrial uses and have overlooked their scarcity—a characteristic that likens them to gold as a hedge against inflation. As a result, we observe that gold's value relative to other precious metals is trending higher. This presents an opportunity for silver and platinum to follow suit and shine like gold: increasing inflationary risks, a weakening dollar, and heightened geopolitical tensions.
Lastly, as we have highlighted in our previous article, should Japan’s Liberal Democratic Party (LDP) fail to secure a majority, this political uncertainty is likely to weigh on the short-term outlook for Japanese equities. On October 28, the LDP lost the majority seats in Japanese parliament for the first time in 15 years, leaving Prime Minister Shigeru Ishiba with the challenge of a re-election in the coming weeks to win a majority in the 465-member Diet, Japan’s national legislature. This political uncertainty shrouded the short-term outlook Japanese equities; thus, our bearish view on Nikkei 225 (USD) index futures remains intact.
How do we express our views?
We consider expressing our views via the following hypothetical trades1:
Case study 1: Long Silver Futures
We would consider taking a long position in the silver futures (SIH5) at the current price of 33.005, with a stop-loss below 32.570, a hypothetical maximum loss of 33.005 – 32.570 = 0.435 points. Looking at Figure 3, if the new key support level holds and the reversal occurs, silver price has the potential to reach back to 35.000 and subsequently a new high of 38.725, resulting in 35.000 – 33.005 = 1.995 and 38.725 – 33.005 = 5.72 points. Each silver futures contract represents 5,000 troy ounces, and each point move is 5,000 USD. E-mini and Micro silver futures contracts are available at ½ and 1/5 of the standard contract size.
Case study 2: Short Micro Nikkei 225 (USD) Index Futures
We would consider taking a short position in the Micro Nikkei 225 (USD) Index Futures (MNKZ4) at the current price of 38745, with a stop-loss above 40000, a hypothetical maximum loss of 40000 – 38745 = 1255 points. Looking at Figure 5, with the reversal from the Diamond Top pattern confirmed by new developments in the election, the Nikkei 225 index has the potential to fall back to 33000, resulting in a potential profit of 38745 – 33000 = 5745 points. Each point move in the Micro Nikkei 225 (USD) Index Futures contract is 0.5 USD. Given the increased flexibility and greater precision offered by the Micro Nikkei futures contracts, it is not surprising that both the USD and JPY-denominated contracts have demonstrated exceptional liquidity and interest in the first week following their launch; bolstering more than 30,000 combined daily volume last week. Standard Nikkei 225 index futures contracts are also available with each point move equivalent to 5 USD.
Original link here.
EXAMPLES CITED ABOVE ARE FOR ILLUSTRATION ONLY AND SHALL NOT BE CONSTRUED AS INVESTMENT RECOMMENDATIONS OR ADVICE. THEY SERVE AS AN INTEGRAL PART OF A CASE STUDY TO DEMONSTRATE FUNDAMENTAL CONCEPTS IN RISK MANAGEMENT UNDER GIVEN MARKET SCENARIOS. PLEASE REFER TO FULL DISCLAIMERS AT THE END OF THE COMMENTARY.
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