Higher US bond yields and a stronger dollar are a toxic combination for the prices of precious metals. With downtrends in place and a succession of support breaches, we are increasingly negative on the outlook for commodities such as Gold, Silver, Platinum and Palladium.
- Gold runs a consistently strong negative correlation with both US bond yields and the US dollar (USD)
- The outlook for Gold has deteriorated further in recent days
- This growing negative outlook is also a feature of Silver, Platinum and Palladium
Gold negative correlations with US yields and USD
We continue to see that gold has a strong negative correlation with two key markets, US bond yields and the US dollar. Both yields and the dollar are tracking higher, and this is a key factor in dragging the price of gold lower.
Starting with bond yields. Longer-dated bond yields are a key driver of major markets. The 10 year Treasury yield has an average correlation of -0.35 with gold in 2020.
However, the correlation between gold and US bond yields becomes even more strongly negative when looking at “real” bond yields (bond yields minus inflation). The average correlation since 2020 of gold with the US 10 year Inflation Protected Securities is -0.54.
These correlations show that if bond yields continue to rise (and inflation does not move sharply back higher from here) then gold will be under mounting negative pressure.
Now we add in the USD aspect too. A stronger dollar is negative for gold. The negative correlation between gold and USD is very strong at the moment. Since 2020 the correlation has averaged -0.41, however, this year the negative correlation has averaged an extremely strong -0.63. This suggests that the dollar direction is crucial for gold right now.
Technical analysis for gold is increasingly negative
Onto the technical analysis charts now. Gold (MT5 code: XAUUSD) has struggled with a succession of lower highs since peaking at the all-time high of $2075 in August 2020. After a relatively quiet phase over recent weeks, the recent dollar strengthening has begun to weigh on the price of gold.
Breaking below an old key pivot band $1750/$1760 in the past week has turned the outlook negative once more. The risk is that this old pivot band now becomes a basis of resistance. Momentum is negative but with the relative strength around 35/40 there is still downside potential in the breakdown.
We now see near term rallies as a chance to sell within a sharp four-week downtrend which is falling around $1770 today. We favour downside pressure towards $1720 initially but we see $1675/$1700 as a realistic medium-term outlook.
It would need a decisive rally above $1790 to suggest the bulls had any sustainable recovery potential.
Other precious metals are under pressure too
We also see downtrends and negative outlooks having developed on other precious metals too. On Silver (MT5 code: XAGUSD) there has been a consistent drive lower in a downtrend since the beginning of June. The longer-term chart shows this as a move to the bottom of a broad trading range of $21.65/$30.10. However, if $21.65 the key range floor support is breached then the next support band is $18.90/$19.60.
On silver, looking nearer term, we see the importance of old key levels, where old support becomes new resistance. The latest breakdown below $22.75/$23.15 leaves this as an important band of resistance now. We see a sharper four-week downtrend adding downside pressure and we look to use any intraday strength as a chance to sell. The immediate support is at $22.00 but given the negative configuration on the RSI momentum indicator, we continue to favour testing of not only $22.00 but also $21.60 in due course.
We also see a crucial downtrend formation on Platinum (MT5 code: XPTUSD). Lower highs and lower lows. The move is tracked by the falling 55 day moving average and momentum is negatively configured on the RSI. We look for a continuation of the trend and a retest of the $889.40 reaction low.
Finally, we look at Palladium (MT5 code: XPDUSD), which looks to be the most negative of all. An accelerating decline in the price has taken hold in recent months. The prospect of recovery looks difficult with the market continually selling into near term strength. A move back below the $1820 reaction low would once more re-open the downside and a test of $1733 would then be open. A decisive move above $2059 would be needed to suggest any realistic chance of sustainable recovery.
If US bond yields continue to climb and the US dollar strengthens further, we expect that precious metals have further to fall. Both fundamentals and technicals seem to reflect this.