Precious metals have turned sharply lower again in recent sessions. The perceived “safe haven” status is counting for little as US Treasury yields and the USD continue to soar higher. Near-term rallies continue to be a chance to sell.
- Higher yields continue to lead to additional downside pressure on precious metals.
- Gold has broken down and is eyeing moves into the $1500s.
- Silver has fallen decisively as risk appetite has plunged. A test of the key support is likely.
Higher yields are negative for precious metals
We have talked extensively about this previously, but the higher US Treasury yields go, the worse it will be for precious metals. This is because the strong negative correlations continue to ring true.
There is a rout in major bond markets that is sending yields sharply higher. The US Treasury markets are not immune to this. The Fed remains intent on tackling inflation, seemingly at the expense of economic growth.
Ever more aggressive Fed policy has pulled Treasury yields sharply higher. However, this has come as inflation expectations remain subdued, even falling in the past month. This is all pulling “real” bond yields strongly higher (bond yields minus inflation).
Higher real yields have also been a key driver of USD strength (as has the flood to the safety of the USD amid market turmoil). There is still a strong positive average correlation between real yields and the USD. The current relationship is extremely positive.
This is all a significant drag on precious metals. Gold is extremely negatively correlated to both the direction of real yields and the strength of the USD. Gold being priced in USD is a key factor behind this.
The correlation between real yields and silver is also historically strongly negative. Although there was a near-term break from this during the middle of September, the relationship appears to be getting back to its normal configuration now.
So, the higher yields go, the worse it will get for precious metals. The US 10-year yield hit 4% today. With worries about inflation and FOMC rates expected to move towards 4.5% in the coming meetings, there is little reason not to expect further upside in longer-dated yields.
Gold has broken down
Looking at the outlook for Gold (XAUUSD), we see the recent downside break below $1680 has opened the next leg lower. Since the spike higher in February, there has been a big downtrend formation. Breaches of key support have subsequently become new resistance.
Even if there are near-term technical rallies in gold, we expect these moves to falter between $1655/$1691 which is now a key area of overhead resistance. There is a slightly stretched position on the daily RSI (below 30) which may begin to induce a technical rally in the coming days. However, we would still be looking to use near-term strength as a chance to sell.
The longer-term outlook has significantly deteriorated with the breakdown below key support at $1680. The weekly chart shows there is initial support around $1610 but a move back into an old support band from 2019/2020 at $1450/$1560.
Silver has posted another bull failure
Silver has been holding up much better than gold in recent weeks. We had been even keeping an eye out for a possible break higher. However, the five-month downtrend kicked in again to cap the upside and a bull failure was posted.
The breakdown below $18.77/$19.02 now leaves overhead supply for any near-term technical rallies. With the falling moving averages, successive lower highs and corrective configuration on the RSI, we favour a retest of the key support at $17.55 in due course.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
