Gold and Silver Analysis: Will Dollar Strength Trigger a Deeper Correction?

The gold (XAU) price failed to break $4,900 and continued to the downside. The weakness was mainly driven by the stronger dollar. The higher U.S. retail sales and business PMIs reduced the expectations of a Federal Reserve interest rate cut this year. That pushed up the dollar and pushed down gold.

On the other hand, the Middle East situation is creating uncertainty in the precious metals market. Higher oil prices and stalled U.S.-Iran negotiations added to inflation concerns, particularly with the Strait of Hormuz at risk. The risks can be positive for gold as a safe-haven. But they also boosted the U.S. dollar and encouraged markets to expect a tightening in financial conditions. This limited the gold rally. However, the broader picture for gold remains bullish, and this short-term correction might offer a long-term buying opportunity for the gold investors.

Silver (XAG) also struggled with some of the same factors. The stronger greenback and falling expectations of interest rate cuts dampened silver’s monetary value. Higher oil prices were also a concern for inflation, cost and demand pressures. This is important for silver as it relies on investment and industrial demand. Escalating tensions in the Middle East may provide some safe haven support to silver with gold. But if the dollar remains strong and rates stay high, silver might not be able to stage a quick rally.

Gold Technical Analysis: Support Zone Comes Into Focus After Failed Breakout

The daily chart for spot gold shows that the price has failed to break above the 50-day SMA and continues to trade lower. Immediate support in spot gold remains at the $4,600 to $4,500. However, a break below $4,500 will push the price towards $4,400. The 200-day SMA now sits around $4,250, and if the price corrects to this level, it will provide a strong buying opportunity.

For short-term traders, the 4-hour chart for spot gold also shows that the price is moving towards $4,600 after the break from the tight range within the triangle. A break below $4,600 will push the price towards $4,400 within the red highlighted zone.

Silver Technical Analysis: Bullish Structure Faces a Test Near Support

The daily chart for spot silver shows strong constructive bullish price action above the $55 to $60 support region. The price failed to break above the $82 area and corrected lower towards the $72 region. A break below $72 will push the price towards the orange highlighted zone within the $55 to $65 region.

Another correction back towards the $55 to $60 region will offer a strong long-term buying opportunity for investors. The 4-hour chart for spot silver shows strong consolidation within the red zone, within the support of the ascending broadening wedge pattern. A break above $82 is required to keep the bullish momentum in the silver market. However, a break below $72 will indicate further downside towards the $60 area in the short term.

Bottom Line

Gold and silver correct lower on the US dollar’s strength, strong U.S. economic data and expectations for higher interest rates. But the long-term fundamentals have not shifted to bearish. Geopolitical risks and strong oil prices and inflation still underpin the long-term precious metals thesis. Gold needs to hold above $4,500 to $4,600 to prevent a larger correction towards $4,400, and perhaps $4,250. Silver needs to hold above $72 to avoid a correction to $55-$65. A more significant correction may present a stronger buying opportunity for long-term investors, but both metals will require a weaker dollar to kick off the next major leg up.

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