Commodities have been sluggish for several weeks. Since finding sharp selling pressure in the middle of November, prices have consolidated in recent weeks, but have struggled to find traction in a recovery. However, there are a few signs in recent days that precious metals are starting to build from support again. We look at what markets need to do for buyers to trust that any recoveries can be backed.
- Traditional correlations have been lost in recent weeks. These will need to resume for moves to be trusted.
- Precious metals will need a reversal of USD strength and real bond yields to fall for prices to recover.
Gold correlations are out of kilter
Gold and Silver traditionally have consistent (and strong) negative correlations with the US dollar (USD) and real bond yields. These correlations have been driving market moves throughout 2021. In the past week or two, these traditional correlations have broken down. They need to resume.
For Gold, the stronger US dollar has hampered the upside in gold for several months. The strong negative correlation between the two has kept gold bulls subdued. Major markets have been far more volatile in recent weeks, trading with elevated levels of fear. This has allowed gold to find support. The correlation has subsequently moved positively. This will not last though. It is very rare for a positive correlation to continue for a long.
The situation is similar with gold and real yields. The correlation has moved into positive territory when traditionally it has been strongly negative. Gold has picked up as “real” yields have also recovered in recent weeks. Once more, we do not expect this situation to last long before reverting to strongly negative again.
For gold to recover sustainably, the US dollar will likely need to fall. This is not something that we expect to happen in the next few weeks. However, what may be more likely is that real yields fall back again, which would help gold to find support. However, if real yields recover further AND we see further USD gains, this would not be positive for gold.
Silver correlations are similar to gold
The situation is similar to silver. Silver is ticking higher in recent days even in the face of USD remaining strong but also real yields moving higher. This is a situation not normally seen amidst the strong negative correlation traditionally seen.
Silver fell as yields recovered in the second half of November. However, a recovery has kicked in on Silver despite real yields holding up in the past week.
As with gold, if the USD remains strong and real yields recover, silver will struggle to sustain gains.
Technicals show hints of precious metals recovery
Interestingly, the fundamentals are not backing the price improvement that is coming through on precious metals in recent days. For now, the technical outlook is improving. This may allow a near-term recovery, but for the moves to be more sustainable, the fundamentals will need to back the move too.
For Gold (MT5 code: XAUUSD), the near-term improvement is coming with the price now looking to hold above $1790. Throughout recent weeks, this $1790 level has been a barrier that buyers have struggled with.
There have been signs of improvement in recent days. Moving above $1800 was the first step, whilst momentum is improving (RSI above 50 for the first time in a month). The next step will be holding consistently above $1800 and then pulling above $1815 for a one-month high. If this can be seen then there is potential in backing a gold recovery towards $1850/$1877 again. Until then, the outlook remains very mixed.
Silver (MT5 code: XAGUSD) has driven a strong rebound from last week’s low of $21.40. A small head and shoulders base pattern is forming today. A close above $22.67 would confirm a near-term recovery and imply $23.90 is possible in the next few weeks. Momentum is recovering too, with the RSI at a one-month high. Technically, the support of the right-hand shoulder (at $22.14) becomes important now as a higher low. This needs to hold to sustain the potential recovery.
Finally, we are seeing signs of improvement also on Platinum (MT5 code: XPTUSD). The rally is behind that of gold and silver, but momentum on the RSI is leading the prospect of a recovery. The first trigger would be to hold a break above 940.00 which would lay down higher lows and higher highs. The important resistance to be broken for a decisive turnaround would be a move above 958.30. This is the first key lower high of the big corrective sell-off. If this can be overcome then the bulls can begin to plan for recovery of note.