The US dollar has been under corrective pressure ever since the better than expected Nonfarm Payrolls report. We are still minded that this is likely to be a near-term move, but the correction is having an impact. Bond yields are also falling. In combination, this is proving to be supportive for commodities, especially precious metals. The recovery in precious metals has now started to find some traction and looks ready to test some key levels overhead. A key medium-term inflection point is near.
- Falling bond yields are supportive for gold and silver, with strong negative correlations still the key factor.
- Technicals show gold, silver, and platinum forming recoveries that could take off if resistance can be breached.
Falling real yields help precious metals
It has been noticeable that Treasury yields have been falling for a few weeks now, but this move has continued since the FOMC meeting last week. Technical analysts will note the 1.450% reaction low on the US 10 year Treasury yield from early October. A break below here would bring the market back to 1.385%, but also break an uptrend.
So why is this important? If bond yields are falling whilst inflation expectations are holding (or even rising), then the “real” bond yield (the level of interest minus inflation) is falling.
We see here the 10 year Breakeven rates (which are how traders gauge US inflation expectations) are higher, but the nominal 10 year Treasury yield is falling. Subsequently, the real yield is falling.
Falling real yields have strong implications for major markets. There is a strong negative correlation between Gold and real yields, with an average correlation of -0.55 since 2020. When the real yield is falling, this helps to drive gold higher (due to gold, which is a zero yielding asset being in higher demand as the opportunity cost reduces).
Note that Gold found a low in early October as the real yield started to fall back again. Real yields are coming back to test four-month lows, just as gold is rallying to test multi-month highs at $1834.
It is a similar picture with Silver and real yields. Another strong negative correlation (averaging -0.4 since 2020) is present and silver is rallying as real yields fall.
So, if Treasury bond yields continue to fall, it is likely that real yields will also continue lower. This would therefore continue to support higher gold and silver prices.
Technicals show key levels to be tested on Gold
On to the technical analysis charts, the improvement in precious metals has been significant in recent days. There seems to have been a shift in sentiment, and decisive medium-term recoveries are close.
Looking first at Gold (MT5 code: XAUUSD), the resistance of $1800/$1810 which has been a barrier for the past couple of months, has been decisively breached. The move is holding, but also with improving momentum (RSI consistently above 50 now). The primary downtrend is also being breached and a new medium-term uptrend channel is developing.
The key test for gold will be the multi-month resistance at $1834. If this can be breached then it would be a big breakout from essentially a 5-month consolidation rectangle. It would open the way for $1900/$1916 again.
We now look for $1800/$1810 to become a basis of support near term. Given the improvement in the technical outlook (RSI above 50 and looking to push into the mid-60s) then we would look to play this recovery now. We look to buy into supported weakness.
Silver and Platinum also recovering well
On Silver (MT5 code: XAGUSD) there is also a decisive recovery developing. Having seen the bulls react so positively into recent weakness the market has recovered strongly in recent sessions. Thie move above the $23.75/$24.00 pivot area now opens the possibility of a test of the crucial overhead resistance at $24.80.
The improvement is such that a potential three-month “head and shoulders” base pattern has emerged. A decisive close above $24.80 would complete the pattern which would imply a medium-term upside recovery target of $27.60.
Strengthening technicals include a “golden cross” (on the 21 and 55 day moving averages), and the RSI holding consistently now above 50. This all points to buying into weakness for that test of $24.80.
Finally, we are also seeing decisive improvement in the outlook for Platinum (MT5 code: XPTUSD). The uptrend recovery has continued since late September and the market is now using the pivot around $1000/$1025 as a support area. The outlook has decisively shifted on momentum too, with the RSI consistently finding support around 50 now.
Our strategy is to buy into weakness now. A breakout above $1075 opens the next key resistance area at around $1145. A decisive breach of $995 would abort the recovery.
The outlook for precious metals is improving. If real yields remain under downward pressure, the metals could take off. Although there is key resistance that still needs to be overcome, we are backing the continued recovery.