Gold and silver have failed to shine despite falling bond yields in recent days, and today both metals slumped hard.
The metals’ poor performance may be due to several reasons, rather than just one factor. For a start, the U.S. dollar has managed to hold its own despite the Fed’s dovish turn on interest rates. The dollar bears – and by extension gold bugs – have been left frustrated because of the fact other major central banks have also turned dovish, thereby keeping the dollar supported indirectly as foreign currencies tumbled. On top of this, the ongoing economic slowdown and renewed weakness in emerging market currencies has raised fears over demand for metals in their physical form, with falling inflationary pressures further dampening its need as an inflation hedge.
Furthermore, with palladium imploding, this has reduced the appetite for precious metals even more. Palladium has been going up the stairs since August, but over the past few days it has taken the elevator on the way down. gold’s breakdown below the technically-important $1,300 handle no doubt gave rise to technical selling today, which undoubtedly accelerated the move down. Ultimately, though, we think the downside could be limited for gold. The sell-off has come on the back of a sizeable rally from last August. A correction was always needed to shake out the weaker hands and lure in bargain hunters. While it might be too early to talk up the prospects of a bottom for gold, it is worth noting that the precious metal has now reached a key technical area around $1,290, the base of its previous breakout. It needs to reclaim that $1,300/$1,305 area first to repair some technical damage. However, more pain could be on the way should the most recent low $1,281 gives way.
Source: TradingView and FOREX.com.
Also, the Philadelphia Gold and Silver Index (XAU) is indicating, based on the QuantCycle Oscillator, that it is overbought (see chart).
The QuantCycle forecasts relatively flat performance in XAU, so once gold retreats from overbought territory, there may not be much more additional weakness to exploit.
