Gold and silver have extended their advance from Friday when both metals closed the session positively to end their recent poor run. The turnaround comes as the dollar continues to be sold, with the Dollar Index now down for the third consecutive day. Commodity dollars continue to outperform amid ongoing reflationary trade, although we have also seen the likes of the yen and euro push higher today. Yields have also eased back down today, with German 10-year bunds turning negative after rising earlier to their best levels since early June. In the US, yields on 10-year Treasury notes dipped to 1.336% after rising as much as 1.394% earlier – a level last seen on 25 February last year.
It is obvious central banks are starting to get worried about the pickup in yields with investors expecting the ongoing government and central bank support to turbo-charge the economic recovery when national lockdowns end. ECB President Christine Lagarde, for example, today said the central bank is closely monitoring longer-term nominal bond yields. The Reserve Bank of New Zealand will likely stress the need for ongoing monetary support when it is widely expected to leave rates at 0.25% on Wednesday. Even the US Federal Reserve has reminded us that QE will not be ending any time soon. Although the economic recovery has been better than expected in some regions of the world, these central banks will be mindful of the many risks ahead as the coronavirus pandemic continues to rage globally. So, the major central banks will probably not want get ahead of the curve and risk pushing up the value of their respective currencies by signalling a tightening cycle prematurely. Indeed, if anything, with many foreign currencies already having risen so rapidly, they will be keen to verbally talk down their currencies.
Against this backdrop, I can’t see yields go significantly higher from current levels. This should allow gold and silver to remain supported, or for the downside to be limited.
Still, despite today’s rebound and the recent troubles, gold remains stuck inside a long-term consolidation pattern, with the key support range coming in between $1765 to $1800 as can be seen from this weekly chart:
Source: ThinkMarkets and TradingView.com
Prices need to climb above the resistance trend of the above falling wedge pattern to tilt the bias back in the favour of the bulls.
On the daily time frame, we can see that gold was testing a key area of potential resistance at the time of writing, between 1810ish and 1816ish:
Source: ThinkMarkets and TradingView.com
If the sellers are still in charge, this is about the area where we could see renewed weakness from.
The key line in the sand is at $1855 – the most recent high. If and when this level breaks, then that is when we will have formed our first key reversal sign: a higher high. Until such a condition is met, the bulls should proceed with extra care as this could turn out to be another short-lived rally.