Gold And Silver - Divergence Could Lead To Opportunity
Prices have slipped.
The dollar is supportive for precious metals.
Interest rates weigh on the shiny metals, for now.
Support and resistance levels.
Three reasons for higher prices later this year.
Gold and silver both repeated their patterns of lows in December and price recoveries at the start of a new year for the third time in late 2017 and early 2018. It is likely that the markets' perception that higher rates weigh on prices that caused the December lows. During the final months of 2015, 2016, and 2017 the U.S. Fed hiked the Fed Funds rate by 25 basis points which at least contributed to selling in the lead up to the central bank's announcement. However, in a case of sell the rumor and buy the fact, gold and silver both rallied in the aftermath of the Fed's move.
On January 25 the price of gold rallied to just $7 below its 2016 at $1377.50 on the COMEX April futures contract on January 25. On the same date, silver finally rose above technical resistance at $17.50 reaching a peak at $17.705 per ounce. However, increased volatility across all asset classes over recent weeks has caused the prices of the two precious metals to retreat.
Prices have slipped
Over recent sessions, we have witnessed a reversal in fortune for the prices of both gold and silver.
Source: CQG
As the daily chart of COMEX April gold futures highlights, the price declined from highs of $1370.50 on January 25 to lows of $1309 per ounce on February 8. The price has since recovered to the $1326.50 level on February 12. Ironically, gold's low in 2018, before the recent drop was at $1309.30 on the first trading session of this year. Gold could only manage to drop 30 cents below that low. The daily pictorial shows that open interest, the total number of open long and short positions in COMEX gold futures increased with the price from mid-December 2017 and declined with the price since mid-January. While the rise in the metric provided technical validation for the move higher, the decline is not typically a signal that a bearish price trend has taken hold of the gold market. At the same time, price momentum declined to an oversold condition, and on Monday, February 12 appears to be attempting to cross higher as the price of the yellow metal recovered.
Source: CQG
The daily chart of COMEX silver futures illustrates that the price staged an impressive recovery from the mid-December low at $15.635 per ounce on the nearby March futures contract and rallied to a high of $17.705 on January 25. Last week, as markets across all asset classes, became highly volatile and gold declined, silver dropped to a low of $16.13 per ounce, before recovering to over the $16.50 level on Monday, February 12. Like gold, open interest in silver futures moved lower with the price and silver fell into oversold territory on the daily chart. While the prices of both gold and silver are appreciably lower than they 2018 high established on January 25, there are factors that continue to support the precious metals.
The dollar is supportive for precious metals
There is a long-standing inverse historical relationship between precious metals prices and the level of the U.S. dollar against other world currencies. The dollar is the reserve currency of the world, and a weaker dollar tends to be supportive for the prices of gold and silver.
Source: CQG
As the weekly chart of the U.S. dollar index shows, the greenback index reached a high in January 2017 at 103.815 which was the highest level since 2002. The dollar moved steadily lower throughout 2017 and reached its most recent low at 88.255 on January 25, the day that gold and silver traded at highs.
Over recent sessions, the dollar has bounced, ever so slightly, to a high of 90.455 on February 8, the day that the precious metals posted their recent lows. Meanwhile, the dollar was straddling the 90 level on February 12 and gold, and silver prices have been trading almost tick-for-tick with the greenback. While the dollar has recovered, it is not running away on the upside which could be good news for precious metals prices.
Interest rates weigh on the shiny metals, for now
We have seen how higher interest rates have caused gold and silver prices to move lower during the final months of the past three years. The anticipation of each twenty-five basis point hike in the short-term Fed Funds rates caused selling and lows in the prices of gold and silver. However, both precious metals bounced higher almost immediately following the central bank rate hikes.
Over recent weeks, a rise in longer-term rates has spooked stocks and precious metals prices. While the central bank controls short-term rates, the market dictates longer-term yields. 
Source: CQG
As the monthly chart of the 30-year U.S. Treasury bond futures contract shows, the bond fell below support at 147.07 in January 2018 and continued lower in February leading to an increase in interest rates. Many analysts have blamed the recent correction in stocks on lower bond prices and higher rates. When it comes to gold and silver, higher rates can have one of two impacts on prices. On the one hand, rising rates increase the cost of carrying inventories and long positions which weighs on prices. On the other, higher bond yields that are the result of inflationary pressures, are inherently bullish for precious metals prices which are often the best barometers of inflation. Over recent weeks, lower bonds and higher rates have weighed on gold and silver prices, but that could change if inflationary data begins to emerge in the weeks and months ahead.
After a decade of accommodative monetary policy, it is possible that inflationary pressures are the result of artificially low short-term rates and quantitative easing which kept longer-term rates low via an implied put option on the bond market. Therefore, while the knee-jerk reaction to higher rates has been selling in gold and silver, we could see a resurgence if the market begins to perceive central bank policy as behind the curve when it comes to controlling emerging inflationary pressures.
Support and resistance levels
A weak dollar and rising interest rates provide conflicting signals for gold and silver prices. The weak dollar is bullish, while higher rates can be bearish. Therefore, gold and silver are currently in a situation where other markets are pulling them in opposite directions when it comes to the path of least resistance for prices.
Technical resistance for gold stands at the 2016 at $1377.50 per ounce. While the yellow metal came within $7 of that level on January 25, it is now over $50 below as of February 12. On the downside, technical support is at recent lows at just under $1310 per ounce, and then at the December 2017 low at $1242.70 on the December futures contract. While gold is closer to resistance than support, the wide range of $134.80 per ounce means that we could see price swings in the price of gold over coming sessions.
Source: CQG
The weekly chart shows that the yellow metal has been making higher lows and higher highs since late 2016. Only a move below $1236.70, the December 2017 low on the continuous contract would violate the current bullish price pattern.
Silver is a volatile metal as it tends to attract more speculative interest than gold. Support for March silver futures is at the December 2017 low at $15.635 with resistance at recent highs at $17.705. Above the January 25 peak, $18.36, the high on the March contract from September 2017 stands as the next level of technical resistance. 
Source: CQG
While the weekly gold chart displays a bullish pattern of higher lows and higher highs over recent monthly, the picture in silver is the opposite when it comes to highs. As the week continuous silver futures contract shows, the price has been making lower highs since July 2016 when the price reached just over $21 per ounce. The January 25 peak at $17.705 now looks like just another lower peak. To break the pattern, silver will need to trade above that level which was more than $1.15 per pound above the price on February 12.
There are many bullish and bearish factors at play in the gold and silver market these days which collectively produce a confusing picture for the path of least resistance of prices. However, I believe three factors will eventually take the prices of these metals higher over the coming weeks and months.
Three reasons for higher prices later this year
The first reason that I am bullish for gold and silver prices is that volatility in markets, across all asset classes have increased dramatically over recent weeks. Periods of fear and uncertainty often provide a bullish landscape for gold and silver prices. While the correction in the stock market and fall in bond prices initially caused some risk-off type selling in precious metals, they are traditional safe harbors for capital which should lead investors and traders to the metals during a flight to quality periods.
The second reason is the geopolitical landscape. The Middle East remains a highly turbulent region. Over recent days, we have seen increasing tensions and military action between Israel and Iran. Additionally, Saudi Arabia and Iran continue to fight a proxy war in the region in Yemen, and there is no end in sight for the blockade of Qatar by KSA and their allies in the area. While the winter Olympics have apparently calmed some of the rhetoric between the U.S. and North Korea, nuclear weapons on the Korean Peninsula remain unacceptable to the U.S., and there is no sign that Kim Jong Un will ever back down. In the U.S., the special prosecutor continues to lurk in the background. Any high-level indictments of Administration officials or any challenge of the President could throw markets into a tizzy which could be supportive for precious metals prices.
Finally, and perhaps most significantly, inflationary pressures on the global economy could lead many investors to safe-haven assets like gold and silver in the weeks and months ahead. At the same time, the ECB runs the risk of stoking inflation, if they do not move to end QE and increase rates from negative forty basis points sooner, rather than later. A move by the ECB would likely be supportive for the euro and cause the dollar to continue on its downward path.
The bottom line is that there many issues facing the world these days that are historically bullish for the prices of gold and silver and the recent correction in prices could be another opportunity for buyers. Since silver tends to be the more volatile metal, I believe that silver will eventually lead the precious metals sector higher. 
Source: Barchart
SLV is the highly liquid silver ETF product. At $15.61 per share, I believe that risk-reward favors the upside with a stop below the July 2017 low at $14.44 per share.
There are bullish and bearish factors at play in the precious metals these days, but I continue to believe we will see higher highs in both silver and gold in 2018. Buying precious metals on dips and taking profits on rallies tends to be the optimal approach to trading in this sector.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always maintains long and short positions in commodities futures, options, ETF and ETN products, but those positions tend to change on a daily and intraday basis.