Gold, silver risks evenly balanced as reflation hopes counteract US dollar strength

• Gold and silver are coiling near recent highs
• Both are finding tailwinds from reflation hopes, lower USD and bond yields
• US payrolls, ISM services key events for near-term outlook

Gold and silver are coiling up beneath the recent highs. While convention suggests breakout risks are to the topside, the threat of a large-scale reduction in Fed rate cut bets looms large, placing emphasis on incoming US payrolls, ISM services data to drive direction. 

Gold, silver enjoying reflationary backdrop

From a fundamental perspective, gold and silver continue benefit from broader macroeconomic conditions, displaying strong inverse correlations with 2024 Fed rate cut pricing and a lesser inverse relationship with the US dollar index over the past month.

The reflationary environment is also providing tailwinds with strong positive relationships with the shape of the US 2s10s Treasury curve, along with a lesser correlation with US 10-year yields which have been pushing higher.

Gold and silver have often been moving in same direction as other long-duration assets with perceived scarcity value, such as bitcoin futures and US tech stocks.

The readthrough for gold and silver is that as long as expectations for large-scale Fed rate cuts helps feed optimism towards the global economic outlook, the path of least resistance for both likely remains higher. However, if markets are forced to pare rate cut pricing meaningfully, or we see escalating global recession risks, it may create renewed headwinds given the implications for demand.

Gold coiling as bullish momentum wanes

Looking at gold on the daily timeframe, you can see the price coiling in a bull flag pattern, pointing to the potential for another leg higher should convention stick to script. However, RSI (14) is trending lower. MACD also looks heavy, suggesting it may soon confirm a potential turning point for momentum.

I’ve been impressed that gold has been able to withstand the latest bout of US dollar strength, but I wonder whether that can continue should markets be forced to pare still bloated Fed rate cut bets.

With signs that US economic exceptionalism may be returning, any signs of strength in upcoming US payrolls, ISM services and initial jobless claims data could create some challenges for gold bulls. The opposite would apply if weak, of course.

Those considering shorts have a number of options available to them, including selling now with a tight stop above pennant resistance for protection. Targets include pennant support around $2631 and horizontal support at $2625.80.

Those willing to wait could see whether the price can break below pennant support, providing the opportunity to sell with a stop above the level for protection. To make that trade work, you’d need to see $2625.80 give way, allowing for a potential flush towards $2600.

For those considering longs, you could buy a potential break of pennant resistance, allowing for a stop to be placed below targeting a return to the record high of $2685. Alternatively, if we were to see a retracement and bounce from pennant support, you could set longs with a stop below the level for protection. Targets include pennant resistance and the record high.

Silver risks skewing lower?

Silver also sits in something resembling a bull pennant, coiling up within an uptrend that began in mid-September. Like gold, RSI (14) is trending lower with MACD looking like it may soon confirm the bearish signal on momentum, suggesting that if we do see a meaningful break, it could be to the downside despite convention suggesting otherwise.

If we do see pennant support break, traders could sell with a stop above for protection. Some buying may be encountered below $31, making that important if the trade initially works in your favour. If that’s overcome, $30.157 acted as a magnet for the price earlier this year on multiple occasions.

Alternatively, if the price were to break pennant resistance, one option would be to buy with a stop beneath the level for protection. The former high of $32.50 would be the initial target with the current high of $32.70 the next after that.

-- Written by David Scutt

Follow David on Twitter @scutty