We have been seeing the precious metals embarking upon a recovery in recent weeks. However, these recoveries have taken a significant step forward in the past couple of weeks, with decisive breakouts through key resistance. The outlook-changing moves require a new strategy. We look to buy into weakness.
- Elevated inflation expectations are keeping “real” bond yields low. This is fuelling the run higher for precious metals.
- The outlook for Gold, Silver, and Platinum continues to strengthen, whilst even Palladium is on a consistent recovery trend now
Inflation fears driving precious metals higher
The huge upside surprise in the US CPI inflation data was a game changer across financial markets last week. Inflation fears elevated, and the pressure on the Federal Reserve to increase interest rates mounted. According to the CME Group “Fed Watch” tool, by the end of 2023 there is an 85% probability of two rate hikes, and now more than 50% probability of three.
Inflation expectations are rising faster than bond yields, which means that the “real” bond yield (nominal yield minus inflation) is falling and are around the lows of the year.
This is helping to drive precious metals higher. There is an ongoing strong negative correlation between real yields and precious metals.
Since 2020, Gold has had an average correlation of -0.57 with real US bond yields. However, in the past six weeks, the relationship has been much stronger than that, mostly between -0.7 and -0.9. This is an extremely strong negative correlation. It means that when real yields are falling, it is strong for gold.
Silver also has a strong negative correlation with real yields, although not quite as strong as gold. Silver averages -0.41 correlation since 2020.
This is all-important as we believe that inflation fears are here to stay. According to Bloomberg, exchange-traded funds that invest in inflation-protected bonds had a record inflow in October. This suggests that markets believe that inflation is set to remain elevated, which will keep downward pressure on “real” bond yields. This will help the performance of precious metals in the months ahead.
Precious metals outlook increasingly strong
Turning to the technical analysis, there was also a key breakout in the past couple of weeks across the precious metals space.
The weekly chart of Gold (MT5 code: XAUUSD) shows that there has been not only a key breach of the primary downtrend but also a decisive breakout above $1834 resistance.
We also see that above $1834 was a key breakout from a base pattern. Taking a conservative implied target, there is now upside potential towards $1965 in the coming 5 months. The daily chart shows a developing uptrend of the past three months, whilst $1810/$1834 is now an excellent band of breakout support.
The only caveat we have from here is that whilst momentum is strong, the RSI is now above 70. This is not negative (it can be a reflection of a strong trend), and given the latest break higher this morning, the bulls are still running higher. The next resistance is at $1900/$1916 and could easily be tested, however, we would prefer to use a near-term unwind back towards $1834 support as a chance to buy.
On Silver (MT5 code: XAGUSD) we have been taken by how well the recovery has formed, it could almost be straight out of a technical analysis textbook! An almost perfect inverted head and shoulders pattern (base pattern) was completed on a move above $24.80 and this is already becoming the basis of support. We see strong support between $24.50/$24.80 now.
The improvement is also coming with a strength of positive momentum configuration on the Relative Strength Index (RSI). The upside projection target of the big base pattern implies $3.80 of upside towards $28.20 in the coming three months. We would certainly be looking to use any near-term weakness as a chance to buy. The next key resistance is at $25.50/$26.00.
The turnaround in Platinum (MT5 code: XPTUSD) has been a steady run of higher lows and higher highs in the past two months. Building an uptrend and using the rising 21-day moving average as a basis of support.
The striking technical aspect of the momentum is that for so long during the Q2/Q3 2021 sell-off was that around 50/55 on the RSI would limit the rallies. Now with the recovery in the past few weeks, the outlook has flipped around. Unwinding moves down towards 50 on RSI is where the support is coming in. We believe that anything around the rising 21 days moving average (currently $1050) would be a chance to buy for the continued recovery. The next resistance is around $1140/$1170.
Finally, we turn to Palladium (MT5 code: XPDUSD), which has been the laggard of the group. Even Palladium is showing good signs of recovery. Whilst not being quite as bullish as other precious metals, there is a key breakout potentially on the way.
An uptrend recovery has been slow, but steady in the past six weeks, but is now on the brink of breakout a key reaction high. After so long throughout 2021 posting lower highs and lower lows, a move above $2197 would be a confirmation of a trend change. RSI momentum is already calling the upside break, with a move to a six-month high in recent days. We look to play the continuation of this uptrend and buy into weakness, with good support now around $2100.
