Recent events have pushed back expectations of the timing of when the Federal Reserve will taper its asset purchases. A cautious Jackson Hole speech from Fed chair Powell, weaker than expected Nonfarm Payrolls, and sliding consumer confidence have combined to leave the market expecting December as the start of the taper. Markets have reacted, but this may also have been quickly priced in. This leaves the recoveries of precious metals (gold, silver, platinum, and palladium) and energy (oil) in doubt.
- Ranging US Treasury bond yields are hinting at recovery, this will drag on gold.
- With the US dollar (USD) also setting up for a continued range, the upside potential of gold is starting to look limited.
- This is also reflected in the technical analysis of other precious metals.
Yields stable and perhaps higher suggests a gold rally will struggle
Fears of continued high inflation in the US have been subsiding over recent months. The Federal Reserve has been long suggesting that inflation would be transitory. Hard inflation data (CPI and PCE) have shown signs of topping in recent readings, whilst the market’s gauge of expected inflation (the US 10 year Breakeven Inflation) has been flat for a few months now.
Treasury bond yields have been very quiet through the summer months have just started to show signs of picking up again. If inflation is flat, this means that the market is more confident about growth prospects. Whilst, for now, we do not expect yields to pick up dramatically, this at least continues to stabilize “real” bond yields (bond yield minus inflation). This is at best neutral for gold, but if real yields rise, then it could be negative for gold (which is a zero-yielding asset and seen as a safe haven play).
The 21-day correlation between “real” yields and gold has averaged around -0.5 over the past 5 years. This is a very strong negative correlation. Although this correlation has swung above zero recently, we do not expect this to last, especially if bond yields continue to move higher.
USD looks to be ranging, this will not help Gold upside
Yesterday we focused on how the disappointment of a dovish Powell and weaker than expected Nonfarm Payrolls could already have been factored in by the market. We believe that Dollar Index could now begin to range between 91.80/93.70.
If this is the case then it seems likely that Gold will struggle for sustained upside. We noticed this week that the resistance around $1834 held the market back. This will be an interesting level to keep an eye on now.
Our charts show that there is a strong negative correlation between Gold and the US dollar. The 21 day Correlation averages -0.6 throughout 2021 and this is around where the correlation currently sits. USD finding support would match with Gold finding resistance.
Gold backing away from resistance, so are other precious metals
We have seen this week that as USD has found support, Gold (MT5 code: XAUUSD) has backed away from resistance at $1834. The Relative Strength Index (RSI) momentum indicator has also once more faltered around 60.
We will be watching support at $1801 with intent now. This is the first real higher low of the rally in the past month. A close under $1800 would suggest $1774/$1780 comes back into play.
Silver (MT5 code: XAGUSD) looked to be taking off from a base area last week. A decline (mostly today) now questions this move. The support area between $23.95/$24.25 needs to hold, as a close under $23.75 would be a significant rejection of the recovery. The importance of resistance at Friday’s high of $24.85 will grow by the day.
We have also seen both Palladium (MT5 code: XPDUSD) and Platinum (MT5 code: XPTUSD) backing away from key resistance levels. The concern for both of these is that these attempted recoveries seem to be faltering just around levels where previous bear market rallies within their downtrends have rolled over.
Resistance levels:
- Platinum $1025/$1053 is increasingly important
- Palladium $2440/$2488 is a strengthening barrier
The bulls will need to work very hard to prevent this from being just another selling opportunity.
Conclusion
A bottom in place for US bond yields and support for USD will restrict the recoveries on precious metals. It is too early to say whether these are renewed selling opportunities, or just part of a growing consolidation, but the technicals suggest the bulls need to work hard now.
