There has been a decisive shift in sentiment in major markets. With Treasury yields moving into reverse, the US dollar (USD) has turned corrective. This is playing out across major forex, but there is also a knock-on impact to this. Precious metals are building recoveries once more. The longer this USD correction lasts, the further the recovery in precious metals can go.
- Yields and USD have turned decisively lower. With the negative correlations with precious metals, this is positive for the performance of gold and silver.
- Precious metals are moving higher and are breaking clear of key resistance.
The performance of precious metals is improving
Here we see the chart of the one-month performance of major commodities and the US Dollar Index. Platinum and the oil price have fluctuated throughout the month, however, there is a far more determined direction for other precious metals.
The end of April and the first couple of weeks in May saw further USD strength. This weighed on the precious metals, with Palladium and Silver decisively underperforming, whilst gold has also dragged lower. However, in the last 10 trading days, there has been a shift, with the USD falling back. This has allowed the performance of precious metals to pick up again.
There is a clear trend that a falling USD is positive for precious metals.
Lower yields and a lower USD mean higher gold and silver
For some time we have discussed the negative correlations that US Treasury yields (especially “real” bond yields) and the USD have with gold.
US Treasury yields have been declining in the past couple of weeks as inflation expectations have fallen sharply. “Real” bond yields (yields minus inflation) have stopped advancing.
Real yields have been a factor in driving the USD strength, but for now, are not the decisive factor. USD is falling away despite real yields consolidating. This move is accordingly reducing the correlation between the two.
However, the falling dollar is having a supportive impact on the Gold price. Even though the correlation has ticked higher recently, it remains strongly negative over a 21-day calculation.
USD continues to correct
So, a falling USD is supportive for gold. We believe that the unwinding move of the Dollar Index has further to travel.
The corrective move on the USD has unwound sharply through the 38.2% Fibonacci retracement of the April to May rally of 97.68/105.00 (at 102.20). The 50% Fib is the next target for potential consolidation, around 101.35.
However, previous USD rallies over the past nine months have seen deeper corrective moves. We have seen as much as 61.8% Fibonacci retracements. This would equate to an unwind towards c. 100.50 in the latest retracement.
However, if the recent rally was calculated from the February low at 95.14 then a potential retracement of 100.0 (50% Fib) or even 98.9 (61.8% Fib) could be seen.
Subsequently, this corrective move for the USD could continue for a further -1% to -3%.
Precious metals are breaking higher
So if this USD correction does continue, then it all adds up to be positive news for precious metals. Already we are seeing metals pushing through important resistance levels.
For Gold (XAUUSD) we see what is likely to now be a fifth consecutive bullish session. If the market closes around current levels, it would also be decisively above the $1850/$1858 resistance band. Given the decisive recovery momentum on the RSI, there is further room to run to the upside. Breaking clear of $1858 opens the old lows of February to April between $1890/$1920. This is a clear target area now.
For Silver (XAGUSD), today’s move higher is straining to finally close above the resistance at $22.00/$22.10. If confirmed it would complete a small base pattern (shown well on the 4-hour chart) which implies a recovery towards $23.75. The recovery has been less secure on silver than it has been on gold (broader market negative risk appetite has played a role here), but there is a route to recovery with the RSI momentum leading the way higher.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.