On Friday, gold failed the $1,350 breakout resistance among a stronger dollar and higher yields as Hurricane Irma shifted away from the most disastrous course and North Korea (NoKo) did not launch an ICBM ahead of their Founder's Day celebration. I've even heard some pundits say that disaster recovery is actually the fiscal stimulus we have been waiting for.

None of that really has to be true, but just the consideration gets a few folks to tweak their expectations and the market is so one-sided that any selling can cascade quickly. The up-channel is still in place for both gold and silver, but it's the dollar that will determine the trend.

Bull Case

  • December rate hike still probably not happening, though less clear than it was a week ago.
  • $1,300 support with moving average convergence nearby likely stout.
  • Up-channel trend still firmly in place with support at $1,323/$17.50 for gold and silver spot.
  • Fed not hiking next week (no speakers this week from blackout period either).
  • We are always one headline away from restoking macro fears — NoKo in particular — though effects can be muted.

Bear Case

  • From a macro perspective, we are still in a hiking cycle.
  • CFTC crazy long (chart from last week further extended), and O.I. hasn't really changed to suggest a reduction.
  • Most FX crosses seem overcooked against the dollar, GBP especially at 1.33.
  • Equity markets making new highs.
  • Physical gold/silver demand is terrible.
  • Mean reversions for rates, FX and metals all seem likely.
  • SkyBridge PM out saying no case for gold. Counters Dalio from two weeks ago.

Chart 1

Gold (yellow, top portion) has effectively been a levered play on the dollar (blue, bottom portion, inverted) this year, and much of it even more specifically by the 10-year treasury yield (gray, bottom, inverted). Interestingly, silver has underperformed gold YTD at 16 percent vs. 20 percent when it is usually the higher beta play of the two.

Some of that will be from the greatly diminished silver physical demand and the crowded nature of the retail-oriented silver ETF. Gold, for example, has challenged multiyear highs at $1,350, yet silver languishes far below its 2016 peak of $21.

Given the balance of relative monetary policies globally, we would expect the dollar to mean-revert some and pull the precious complex down with it.

Chart 2

We were encouraged to see vols rallying across the curve, but most of it was done in the 3m call space, pulling the rest of the complex with it. As we failed the $1,350 breakout Friday, that 3m 15d index quickly dropped from 16.2 percent to 14.25 percent.

Encouragingly, we have at least seen puts make up some of that difference, rallying from 10.4 percent to 11.4 percent. Realized vols still languish around 10 percent or so, with sellers picking up the spread. It's still a recipe for vega suicide at the long end.

Coin Toss

We like to see the bottom end of the up-channel tested, and the RSI is no longer overbought, so I would expect a few days of reducing length before the next up-trend. The problem, though, is the USD is likely to resume some strength with the 10-year yield gapping back to 2.17 percent at current.

In a vacuum, that will likely drag gold/silver lower in what is still a crowded long trade. I think support holds at $1,300, though.