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Where's gold headed? Watch silver

Simon Dawson | Bloomberg | Getty Images

Where is the gold price going? It's a simple matter of following the S. That's S for silver, not Syria. COMEX silver has led the gold price since 2011, with silver reaching a price peak in April 2011 before Gold peaked in September 2011. The collapse following these price peaks showed the same behavior for both silver and gold. Traders who followed silver had clear warning of how gold would behave once the peak was established.

In 2012 the silver price leadership advantage was reduced. The retreat in silver after it reached a 2012 price peak in September was mirrored by gold in October 2012. While silver still provided a leading indication of gold price behavior, the lead time was reduced.

(Read more: Is silver back in the bull market?)

In 2013 the sliver price lead has narrowed to days from weeks or months. There is now a closer relationship between the price behavior in silver and gold. However, a lead of several days is still enough to give gold traders an advantage. They can monitor developments in the sliver price and watch for a confirmation of the behavior in gold.

The same price rally is seen in the weekly COMEX gold and silver charts, yet the pattern is more fully developed in silver. The key features of the pattern behavior are shown with the Guppy Multiple Moving Average (GMMA) indicator, which tracks the behavior of traders and investors.

The long-term GMMA (shown in red on the chart) is widely separated, which confirms continued selling pressure. When the price rises, investors enter the market as sellers, pushing the price down and reducing the probability that the rally will develop into a trend change.

(Read more: It's not Syria: Here's the real reason why gold is rallying)

The widely-separated long-term GMMA absorbs upward price momentum and delays a trend breakout. On the weekly silver chart the upward momentum created by the current crisis in Syria is beginning to weaken.

This is a long-term trend breakout pattern. It consists of a test of the lower edge of the long-term GMMA by the short-term GMMA (shown in blue on the chart), followed by a retreat, and another retest of the long-term GMMA. In this second rally test the short-term GMMA moves above the long-term GMMA, which signals increasing pressure for a trend change. This second rally test is followed by another retreat and a third rally test. The third test often moves the short-term GMMA above the upper edge of the long term GMMA, confirming a long-term change in the trend.

(Read more: How gold and silver bears may actually help silver)

The very strong support and resistance line near $26.00 (shown as 2600 on the chart) is a major barrier to any strong trend breakout. The silver chart suggests a rally towards $26.00 followed by a retreat and perhaps the potential for another rally retest of the $26.00 resistance level.

What is important is that the behavior of the silver price will provide a guide to the behavior of the gold price a few days later. It's a very useful trading advantage.

Symbol
Price
 
Change
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SILVER
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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy