Gold & Silver Outlook: Strong Dollar and Surging Yields Deepen Pressure as Fed Hike Bets Build
Both metals faced a bearish fundamental outlook on Friday, with higher yields on U.S. Treasurys and an increasing possibility of more Federal Reserve policy rate increases, taking the upside down on the U.S. dollar and increasing the cost of holding non-yielding assets like gold. A growing consensus is that the Fed’s rate hike this month is just the beginning of an extended tightening cycle.
Paulson’s views were echoed by other Fed officials this week, most notably, Williams, who said that “in the current environment, I see it as likely that we will need to increase the target range” at the December meeting. Traders are pricing in a 75% chance of another 25-basis point hike in December. On Friday, the yield on the benchmark 10-year U.S. Treasury note traded at 1.84% and the two-year note, which is most sensitive to rates, traded at 0.31%. The greenback also extended higher against a basket of currencies, up for a second week in a row and the first time since June.
High interest rates reduce the attractiveness of bullion. Reuters reports that the recent increase in the US dollar and expected US Federal Reserve rate hikes have contributed to the recent decline in the gold prices. Rising geopolitical tensions in the Middle East have made investors more risk averse, and have therefore increased the safe haven bid for gold. However, some investors are beginning to view geopolitical risks as inflationary, which would keep central bank policies, including tight monetary policies, for longer periods of time.
The main revision to metal industrial policy would likely have an even greater negative impact on the silver price than on the gold price.
Lastly, U.S. factory production decreased in August after increasing for seven consecutive months. While defense spending is providing some support, the recent decrease in factory production signals that a recession is likely. From a fundamental perspective, the recent changes in the US economy supported a bearish outlook on gold and silver, with an increased likelihood of further US monetary policy tightening.
Gold Technical Analysis: XAU/USD Holds $4,245 Support as $4,304 Resistance Caps the Recovery
As of the 2-hour chart, gold is at $4,275. I see that price has been unsuccessful in rising above the moving averages and the rising trendline. Further, the series of lower highs remains intact, and the recent bounce in the price of gold is probably a correction within a larger broader trend.
The next, and more relevant, area of resistance sits at $4,304. Should price of gold rise above this level, the next area of resistance shifts to $4,396. If support holds, the area of support between $4,245 and $4,216 remains more relevant. If price of gold breaks lower, support sits at the next area of support between $4,181 and $4,216.
RSI is still biased towards the downside, but is in neutral territory. If gold remains below $4,304, I expect lower prices. Conversely, I expect gold to rise towards $4,345 should price rise above $4,304. I would expect lower lows and lower highs towards the $4,216 support should price of gold break below the $4,245 support.
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See all Gold forecastsSilver Technical Analysis: XAG/USD Stalls Below $64.11 as $62.75 Support Remains in Focus
According to the 2-hour chart, the current price of silver is around $63.81. After the recent decline, silver is trying to bounce back from that level. Currently, silver is still under both the moving averages, and it is still below the resistance area between $63.81 and $64.11. Furthermore, the longer-term pattern in silver is still forming lower highs.
Thus, I am bearish on silver on this shorter-term time frame. The initial resistance is located between $63.81 and $64.11. A clear andress above the $64.11 level will potentially open the way higher to the resistance found at $64.92 and then $65.83. On the other hand, the first important support is located at $62.75. If silver breaks lower from here, the support zone between $62.35 and $61.46 will come into play.
RSI is still trending lower. However, the recent movement of RSI has caused the indicator to bounce from the oversold condition. Therefore, I believe that silver is likely to drop from the current price level. However, I can be wrong, and a close above the resistance at $64.92 will negate this analysis and it will be time to become bullish.
