Precious metals have fallen decisively over the past 10 days. It seems that to an extent, precious metals have begun to trade as risk-on assets (positively aligned with risk appetite). However, there is also a line of US dollar (USD) strength that is significantly impacting too. This suggests that the near-term outlook will be impacted by swings in risk sentiment, but the outlook for the USD will also be key.
- Precious metals are under pressure even as risk appetite has fallen. This has come due to the enormous strength of the USD.
- USD strength is becoming increasingly stretched and at risk of a near-term unwind.
- This would likely help precious metals to rebound.
USD helped by divergence of central banks
The dollar run has been notable over recent weeks. Significant selling pressure on EUR/USD, GBP/USD, and most notably yen underperformance (driving USD/JPY higher) have taken hold.
This has come as market participants have taken a view that most major central banks may not be able to tighten monetary policy as much as previously thought. This has especially impacted GBP/USD, whilst the still exceptionally dovish Bank of Japan has driven huge selling pressure on the JPY today.
It is like the Dollar Index is like a runaway train, that cannot be stopped. Upside targets have more than been hit and the dollar is trading at post-pandemic highs.
It is interesting to see that this USD acceleration higher is coming despite a consolidation on real US yields. This reflects the divergence coming from the Fed (huge tightening expected) versus other central banks (less able to tighten). However, USD may not be able to continue to climb much further without hitting some kind of retracement move. The daily RSI on Dollar Index is c. 80 which is the most it has been since March 2020. Profit-taking may begin to hit the USD soon.
The near term improvement in risk is helping precious metals
So, how does this dollar move play into precious metals? In the course of the past couple of weeks, precious metals have been sold sharply lower. However, there are signs of a turnaround in recent days.
We note the improvement in Platinum and especially Palladium in the past few sessions. Palladium is one of the more volatile precious metals, but the one-month performance chart shows that its directional performance is similar to that of gold (albeit gold is far less volatile).
However, these moves also coincide with the swings from negative risk appetite towards one of improvement in recent weeks.
Below we have a chart of Palladium overlayed with the S&P 500 futures, the direction of which is considered to be a gauge for risk appetite. When the appetite for risk is positive, this is positive for equities, and vice versa. Note how Palladium (a precious metal) has traded with a close correlation to moves on Wall Street in the past two weeks.
This suggests that commodities are trading with a positive correlation with risk appetite for now. We are seeing an improvement in risk appetite today, and hence support coming in for precious metals.
These moves are coming as the USD remains very strong. However, if the USD began to correct at the same time that risk appetite improved (this is a reasonable assumption) then precious metals would likely get a double boost, at least near term.
The levels to watch on Gold and Silver
So, turning to the two most widely traded precious metals, gold and silver. The chart of gold (MT5 code: XAUUSD) shows a sharp correction in the past two weeks (note the steepness of the downtrend). This has broken below $1890 and is now putting big pressure on the old February low at $1877. Technically, a confirmed closing breach of $1877 would open a much deeper correction towards $1815/$1845.
The 4-hour chart shows that a corrective outlook is still in play. How the market reacts around $1890/$1896 will be an initial gauge for appetite in a recovery. It is interesting to see this morning’s rebound faltering around the overhead supply. Furthermore, there is further resistance of overhead supply around $1910/$1915. To engage in a serious recovery, these levels would need to be breached.
For silver (MT5 code: XAGUSD), the barriers to recovery appear to be more considerable. A decisive breach of a support band of $23.85/$24.15 is now an area of key overhead supply. A recovery into this resistance band would need to break out in order to be considered anything more than a bear rally.
Breaching the sharp two-week downtrend would be a start (not seen yet) but the RSI is now around 30 and is considered stretched. The potential for a near-term technical rally to take hold is growing. The question would be whether any recovery could push above $24.15 to engage a decisive rally.
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