With interest rates falling and central banks dovish, is it time to invest in precious metals? Fawad Razaqzada poses this question.
Following a sharp sell-off last Thursday, gold prices have since stabilized. Last week’s weakness was due, among other things, to the strength of U.S. dollar and renewed risk appetite, which saw U.S. stocks rebound after a small pullback the week before. But as mentioned then, the downside could be limited for gold due mainly to the recent falls in global bond yields and the fact that the Fed has dropped its hawkish bias. Although they have rebounded, yields remain near their recent lows and barring a sharp recovery, this should help to boost the appeal of noninterest-bearing precious metals on a relative basis. In other words, the opportunity cost of holding gold has fallen, relative to, say, a few months ago. Last week’s sell-off came on the back of a sizeable rally that started last August. A correction was always needed to shake out the weaker hands and encourage fresh bargain hunting in gold.
Interestingly, the metal continues to hover around the technically-important $1,290 level, which we had highlighted on Thursday as a potential support. Here, it may have created a potential reversal stick yesterday. If the metal now starts to form a base above yesterday’s high of $1,292 then we could see the sellers move out of the way quickly in light of the above fundamental considerations. Thus, a potential rally from here would not come as surprise. The last time gold fell this sharply was at the start of March, but then also there was no follow-through to the downside. Could we see a similar pattern unfold this time? Gold will still need to reclaim that $1,300 to $1,305 resistance area to repair some technical damage. However, more pain could be on the way should the most recent low around $1,281 give way first.
Source: TradingView and FOREX.com.
Silver creates potential reversal pattern
While gold may be on the verge of a comeback given the recent falls in bond yields and the Fed’s U-turn on interest rates, silver looks more appealing from a technical standpoint.
Silver’s dip yesterday to take out the prior lows around $15.00 was quickly rejected and the metal closed back above this key long-term support level. The resulting price action has left behind a long-legged doji/hammer candlestick pattern on the daily chart. Not only do we have a bullish-looking daily price candle near a key support level, but we also have a potential reversal pattern in the form of a false break. That’s not to mention the fact that all of this has happened around the 200-day moving average.
Given these technical considerations alone, we think that silver could be about to stage a meaningful rally. It has already shown some further bullish follow-through above yesterday’s range, which confirms that the bulls may have stepped back in. A break above the most recent high at $15.20/22 area could trigger further follow-up technical buying. That being said, any closing break back below the $15 level would invalidate our bullish view.
Source: TradingView and FOREX.com.
