Gold and silver analysis: XAG/USD nears major support

• Gold and silver analysis: Metals have been hit by profit-taking, strong USD and reduced rate cut bets
• Precious metals remain in dip-buying mode, with prices no longer extremely overbought
• Silver technical analysis suggests XAG/USD could rebound from breakout area circa $25/$26 zone

Gold and silver analysis: Precious metals hit by dollar strength, reduced Fed cut bets

Gold and silver have continued to ease from their recent highs, with the yellow metal trading below $2300 post-FOMC and the grey metal nearing the $26 level. Precious metals have finally responded to the recent strength of the US dollar and reduced Fed rate cut bets amid hot inflation data. Both metals rebounded after the latest US monetary policy decision and Powell’s remarks at the FOMC presser, before easing lower again. Silver has now hit its lowest level since early April, while gold was yet to test this week’s earlier low of $2280. It remains to be seen whether the metals will ease further lower, though, even if there will be no imminent interest rate cuts from the Fed. We have a couple of US macro pointers later on before the focus turns to the key US monthly jobs report and the ISM services PMI at the end of the week. These data releases could impact at least the short-term trajectory of precious metals. But given the underlying strong trend of precious metals, could we start to see the next phase of the rally commence this week, following the recent pullback?

Gold and silver analysis: Metals remain in dip-buying mode

While the potential is there for the correction to extend, both metals remain in demand, particularly gold. Gold has been supported because of years of high inflation chipping away at the value of fiat currencies, which is the same reason why Bitcoin has also been hitting record levels, before its recent weakness. Still, with many investors missing out on the recent surge in gold and silver prices, they are now monitoring prices for dib-buying opportunities. Advocates for precious metals emphasise their recent resilience in the face of a strong dollar and rising bond yields. They contend that with prices no longer excessively overbought, the upward trajectory could continue, especially considering the metals’ underlying factors like ongoing central bank acquisitions of gold and the role of precious metals as an inflation hedge. Years of excessive inflation means fiat currencies have significantly depreciated. This is a trend that will continue for a while yet given the sticky nature of inflation in many countries. So, it is likely that demand for precious metals as a dependable safeguard against inflation is likely to remain strong.

But why have precious metals weakened recently?

Despite their longer-term bullish outlook, some investors were happy to take profit on their long metals’ positions. They were probably put off from holding or buying more at recent levels by the fact that global bond yields have remained elevated, increasing the opportunity cost of holding low- and zero-yielding assets over higher-yielding government debt. What’s more, diminished expectations for interest rate cuts from the Fed in 2024 are helping to keep the US dollar supported, which is exerting downward pressure on gold and silver, as well as other commodities denominated in US dollars. Needless to say, the impact of the US dollar strength will only play a temporary role, for as long as we don’t suddenly enter a deflationary period.

Silver analysis: XAG/USD approaching key breakout area

Silver’s recent rally was fuelled by a technical breakout above key resistance in the $25/$26 area, which came to a halt a few weeks ago as prices got extremely overbought, and the US dollar found renewed support. But the big breakout in silver after a multi-year consolidation means traders will be happy to buy the dips. This thesis will be put to the test with the metal now coming back to test the point of origin of the recent breakout area near $26.

Source: TradingView.com

As silver dips back towards that $25/$26 breakout area, watch out for a bullish reversal sign on the smaller time frames for potential long opportunities. I reckon silver is going to find its feet again around these levels and expect to see more gains this year. The grey metal has not even neared the highs of its most recent years around $30, let alone its record peak of near $50 that it had hit in 2011. In contrast, gold has been hitting repeated all-time highs, until easing back in the last couple of weeks.

Therefore, silver has a lot of catching up to do on the upside with gold. This year’s big technical breakout from a 3.5-year consolidation phase may well be the start of a long bull market, and the recent pullback could be just a normal consolidation phase in that process.

The good news for the bulls is that the Relative Strength Index (RSI) has worked off its extremely overbought conditions on multiple time frame, and now it is in the sweet spot of just above 50.0 on the weekly and monthly time frames (not shown on the chart). The daily is not yet at oversold levels, although the 4-our chart has drifted below the 30 threshold. So, the conditions are ideal for a fresh bullish sign to emerge in the next few trading days to signal the resumption of the long-term trend.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R