Gold price flirting with 200-day moving average

After recording decent gains yesterday, gold and silver prices have rallied higher in trading this morning. The gold price has now punched above its 200-day moving average at $1,635 per troy ounce, which could encourage more hedge funds to re-enter long positions in the futures market.

The silver price is trading around $30, but has a lot of work to do in order to recover its 200-day moving average at $36. Recent months have seen strong resistance at $32.50. If silver soon manages a solid finish above this level at the close of a Comex pit session in New York (13.30EST; 18.30GMT), then bullish momentum will clearly have been regained in this market, and – depending on broader market sentiment – silver could move very quickly towards $40.

Silver bulls will also want to see clear signs from Commitments of Traders Reports of rising Open Interest in this market. “Open Interest” is simply the total number of “long” positions in a futures market – which is of course the same as the total number of “short” positions, as for every person who goes long silver futures (i.e., buys a contract in expectation of a higher price), someone must have taken the opposite bet (the short position, or the expectation that the price will fall).

Though the largest commercial traders of silver futures now have the lowest net-short position (LCNS) in silver futures for over a decade (as illustrated by the chart below from Gene Arensberg’s GotGoldReport), we won’t see a sustained increase in the silver price until speculators – both large and small – start dipping their feet back into silver on the long side.

For the moment, though US economic sentiment is improving – something that should favour precious metals with greater industrial utility over gold – fears about Europe’s debt crisis and the Iranian situation are dampening risk appetite. Though there may not be much more in the way of downside in silver at the moment, with very strong buying support in the $26-$28 range, price consolidation in this metal could continue for a little while longer yet.