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(Not So) Precious Metals

by Fawad Razaqzada

Gold took a big plunge below the psychologically-important and support level of $1300 per ounce on Tuesday. The breakdown triggered further follow-up technical selling, causing gold to fall for a time below $1270 per ounce. It ended Tuesday’s session over $40 or 3.4% lower. The selling pressure had been accumulating over the past several days, or weeks even, as market participants apparently moved back to the racier equity markets and away from perceived safe haven assets. Meanwhile the dollar rose on the back of improvement in US data and this weighed further on the buck-denominated metal. However, gold’s plunge wasn’t entirely a dollar story as gold priced in sterling fell too, even though the latter had a rough session of its own on Brexit worries (see the chart of gold in GBP, below). As well as technical selling and the impact of the dollar, one other big reason for gold’s slump was the falls in government bond prices – that’s to say the rally in yields – which also discouraged investors from holding onto gold and silver, assets that pay no dividend or interest, unlike equities and bonds.

So it was a plethora of both technically- and fundamentally-driven bearish factors that caused the plunge in gold. It wasn’t just the yellow metal that took a tumble. Silver dropped by an ever larger 5.4% to record its lowest price since the end of June. On Wednesday, when this report was written, both gold and silver had started to bounce a tad as short sellers took profit on their positions from the previous days, most notably Tuesday. Profit-taking alone may not be enough to underpin the precious metals in a meaningful way, however. Thus if we are to see a more remarkable recovery, sentiment on the metals will need to turn positive. This could happen if, for example, government bond yields start to head lower once again, say as a result of weaker US data this week or a clear denial by the ECB that they are working on the timeline of tapering QE before the end of the programme.

Technical Outlook: Silver

The breakdown below the big $18.25/50 long-term support and resistance level is clearly a bearish outcome in the short-term outlook for silver. For as long as the metal now holds below here the bias remains bearish. However, as can be seen from the weekly chart, the grey metal is still holding its own above the key $17.75 level, which was formerly resistance and is where the bullish trend line comes into play. The sellers would like to see this level break down. If so, silver could then decline further, towards the 61.8% Fibonacci retracement against the December low around $16.50 where the 55-week moving average also comes into play. Should silver ever get around there, then I would expect to see the onset of another big rally. Conversely, a break above the $18.25/50 resistance range could pave the way for a rally towards the next resistance at $18.95 or even higher.

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