Gold and Silver Technical Analysis: Oil Shock Pressures Metals as Breakout Risks Build

Gold (XAU) prices dropped on Friday and headed back toward the week’s losses as rising energy costs resumed to increase inflation concerns. Spot gold extended losses for a fourth straight session and dropped to its lowest level since May 6. The metal is now waiting for the results of the U.S.-China talks.

Oil, yields and the U.S. dollar are the primary pressures. The Iran war has kept the Strait of Hormuz largely closed to Brent crude, which is now trading above $105. This has led to concern about the possibility of energy prices being passed on to other sectors of the economy. As a result, the yields on U.S. Treasuries have risen and the U.S. dollar has appreciated this past week.

Gold is typically considered an inflation hedge. But this is not the case with the present setup. Near-term U.S. rate cuts are no longer on the horizon as higher inflation dampens hopes and hurts non-yielding assets like gold. This is why gold is dropping even though there is a geopolitical risk of war with Iran. Moreover, the silver (XAG) and platinum group of metals such as platinum (XPL), palladium (XPD) and ruthenium were also down on Friday. This reflects general weakness in the precious metals market.

Gold Technical Analysis: Triangle Pattern Signals Breakout Risk

The daily chart for spot gold shows that the price is consolidating at the edge of the symmetrical triangle pattern and looking for the next direction. A break below $4,500 will indicate further downside towards the $4,000 area. However, a break above the $5,000 region will indicate a breakout above the symmetrical triangle and a move towards the $5,600 area.

In the short term, the price may remain in consolidation between $4,500 and $5,000 as energy prices and oil prices remain volatile.

The 4-hour chart for spot gold also shows strong consolidation between the $4,500 and $5,000 region in the yellow highlighted zone. As long as the gold price remains in the yellow region, the spot gold market will likely remain uncertain.

Silver Technical Analysis: Stronger Setup Points to Upside Breakout

The daily chart for spot silver also shows strong consolidation. However, the silver price remains stronger than gold due to the strong bearish trend in the gold-to-silver ratio. The strong rebound from the $72 level, after forming the bullish hammer candle above $61, indicates that the silver price is emerging from a strong bottom formation.

A break above $90 will indicate a strong move to the $100 region. However, a break above $100 will refine the next move towards the $120 area. As long as the silver price remains above the $50 region, the next move in silver will likely be higher.

The 4-hour chart for spot silver shows strong consolidation around the support line of the ascending broadening wedge pattern. A break above the $90 region will define the next move to higher levels. However, a break below $60 will indicate further downside towards the $50 area.

As long as the silver price shows consolidation above the red zone on daily chart, the next move will likely be higher. But the strong rebound from the $61 level and then the consolidation within the ascending broadening wedge pattern indicate an upside breakout in the silver market.

Bottom Line

The higher oil prices, the higher Treasury yields and a strengthening U.S. dollar are taking their toll on gold and silver sentiment. Gold price remains within the consolidation zone of $4,500 to $5,000. A move outside of this range will determine the next big story. Any move above $5,000 may signal a bull market towards $5,600 whereas a drop below $4,500 could set the stage for a move towards $4,000.

Silver shows strength despite the recent weakness in gold. This strength is evident in the gold-to-silver ratio which broke the long-term support area. But the next step still requires a clear breakout from consolidation. Overall, the precious metals have not broken the consolidation zone, but silver is at the forefront of the next rally if risk sentiment improves.

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