Gold, silver, copper: A dovish Fed hold be just the ticket for bulls

Bond yields are moving lower ahead of today’s FOMC meeting, on bets that the Feed will deliver a dovish hold. Markets have priced with an 85.8% probability that the Fed will cut rates by 25bp in September. That is all well and good, but the Fed are yet to signal any such move. But f they do so today, it could weigh further on bond yields as investors load up with more bonds (which move inversely to yields), suppress the US dollar and give metals markets another boost. And they could do with one looking at recent price action with copper down over 20% since its YTD high set in May, and silver’s -14% decline in just 12 days.

Copper and silver are clearly caught up in the weak China-growth story, yet gold is retaining a safe-haven pillar of support and remains a lot closer to its cycle highs. But with the BOJ and FOMC on tap, volatility is expected and metals are likely at the mercy of central banks over the next 24 hours.

Gold technical analysis:

Price action on gold’s daily chart has remained within a choppy range between 2350  - 2500 since April. As outlined in previous analysis, it could retrace lower before it breaks to new highs. But momentum is pointing higher in anticipation of a dovish Fed meeting, and if they deliver I suspect gold could be headed for $2500.

I doubt it will simply break to new highs taking into account how prices struggled above $2500 in April, May and July. But we can reassess prices if they get to or beyond $2500.

The 1-hour chart shows prices look keen to extend their gains ahead of the FOMC meeting in a potential ‘buy the rumour, sell the fact’ move. Bulls could seek dips on the 1-hour timeframe while prices hold above 2420 with 2480 making a potential upside target over the near term. A dovish Fed brings $2500 into focus.

Silver technical analysis:

Not too long ago, silver was the latest ‘big bet’ that only had upside potential. How times have changed. Large Managed funds reduced their net-long exposure by their fastest weekly pace since December last week, while large speculators reduced theirs by the fastest weekly pace in nearly two years. Long bets are being flushed out though and short exposure remains relatively low among both sets of traders, so it is not an all-out bear feast.

But with momentum on the weekly chart pointing lower, it suggests a deeper three-wave correction needs to be completed before bulls want to rejoin with any conviction. While a dovish Fed meeting could certainly help, China woes mean that silver’s upside could remain capped relative to gold.

The daily chart of silver futures shows that support was found at the 200-day EMA on Monday and momentum is turning higher. RSI (14) was within its oversold zone (below 40 during an uptrend) and momentum has since turned higher. Given silver fell over 14% from the July high in just 12 days, I suspect it has further upside potential over the near term. Bulls could seek a move to at least the June low, a break above which brings $30 back into focus.

However, given its potential to underperform relative to gold, I will also be seeking evidence of a swing high in anticipation of another leg lower, which brings Fibonacci cluster around 26.60 and 25-25.20 into focus for bears.

Copper technical analysis:

The sell-off in copper needs no advertising, and it is one of the purer bearish markets where China concerns are. Copper futures have fallen -22% since the YTD high and clearly within a third wave lower. A bullish RSI (2) divergence has formed on the daily chart and volumes are trending lower to suggest bears are losing steam. A bullish divergence has also formed on the 1-hour chart, and prices are meandering around the 200-day MA. Reports of Chinese buying helped prop copper up above $4 last week, and a dovish Fed could help it rebound (even if only slightly).

For me, copper looks extended to the downside and at unfavourable levels for bears to consider wading in. Instead, they could wait for any such bounce and seek to fade into strength, like we saw at the July high in anticipation of another leg lower. Like silver, a dovish Fed could help with such a bounce, but the fundamentals suggest that copper could go lower still.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge