Gold has been ticking higher in the past few sessions. However, for several months we have seen little progress in a move higher on gold. Attempted moves higher have quickly retraced. It is a similar picture for silver (albeit filled with more volatility). We continue to expect this outlook will play out. Near-term gains followed by a retracement. It means that traders should consider short-term positioning and active trade management.
- Real yields moving higher is a stumbling block for stronger precious metals.
- Technical outlooks reflect ranging moves on both gold and silver.
Real yields are moving higher
Into 2022 several key factors have conflicting forces on the outlook for precious metals. Let’s start with a few of the drivers:
- The geopolitical tension between Russia and Western allies over Ukraine. This lends a “war premium” to precious metals such as gold.
- Inflation has been elevated and remains so. This increases the demand for precious metals, seen as a store of value.
- A stronger US dollar (USD) outlook amidst the ever more hawkish expectations of FOMC monetary policy tightening. This is a negative for zero-yielding precious metals such as gold.
So if we look at the outlook for “real” bond yields (bond yields minus inflation), which are historically a key driver for gold. We see that real yields are moving higher.
Perhaps surprisingly, the expectations for inflation have seemed to peak in November 2021. They have been falling or moving sideways ever since. However, this is coming at a time where the nominal US Treasury yields have shot higher. The Fed is reacting to the jump in its inflation metrics. Even if inflation expectations are falling, the market is factoring in more rate hikes by the Fed and this is pulling Treasury yields higher.
The result is an increase in the real bond yield, today at -0.46%. This may still be in negative territory but it is the highest it has been since June 2020.
This is important for precious metals because the higher real yields go, the bigger the factor they play in the decision of whether to buy gold. Historically the correlation has been extremely strongly negative. In the early weeks of 2022, gold and real yields have been more positively correlated (helped by the big equities sell-off and elevated market “fear”). However, this is beginning to unwind and the correlation is gradually realigning with historical norms. The latest sharp run higher on real yields suggests that gold is likely to struggle for sustainable gains.
We can see it is a similar outlook for silver. Higher real yields are historically negative sot silver. This has not been so much the case in January, but into February the traditional correlation is threatening once more.
Play the ranges
So, if real yields continue higher, then we believe that gold and silver will struggle for sustainable gains. Gold (MT5 code: XAUUSD) has run higher in the past week, but we have consistently seen gains towards $1830 have struggled before retracing. This has been the case since June 2021.
Tests of resistance have repeatedly failed, whilst breakouts have not been sustained. We note the consistent failure of the daily RSI around 60/62 which is indicative of range conditions.
Subsequently, we look to trade the range. We expect rallies to fade around $1830/$1850 for an unwind back towards $1800. It means that short-term long positions need to come with active trade management to prevent unwinding any profits built up.
Silver (XAGUSD) has a move volatile range which is wider (between $21.40/$25.40) but we are again looking for near-term positioning on trades. A small base pattern could be about to complete, needing a close above $23.10 to confirm. This would imply a rebound towards $24.00 in due course. However, given the tendency for silver to make sharp moves and then entirely retrace, we would be on the lookout for any near-term exhaustion signals in a recovery.
However, it is important to note that the base pattern has not yet been completed and recovery is not assured. Despite this though, there is good support around $22.00/$22.40 which has held well in recent months. Whilst this support is intact we remain constructive for another near-term rebound on silver and another chance to play the range.
