Gold and silver have extended their gains for the third consecutive day, but now face a key test. The test comes from both technical and fundamental points of view, as investors gauge the strength of $1800 resistance and weigh the impact of surging inflation against the prospects of policy tightening from central banks.
Over the last few days, precious metals have been supported by a drop in US dollar (mainly against commodity dollars), while finding relief from a pause in the bond market sell-off. Yields have fallen despite the FOMC meeting minutes and Fed commentary being hawkish. I believe this is because the Fed’s tapering plans were already priced in, and so the FOMC’s meeting minutes revealed no real surprises in that regard. The small drop in yields has helped to reduce the opportunity cost of holding gold on a relative basis, at least for now.
Gold has also been supported because of inflation. Some investors view the metal as a means of hedging against rising prices eroding the value of fiat currencies. Yet, higher inflation calls for tighter monetary policy, which should mean higher yields… and higher yields is normally bad news for gold. So, the metal remains stuck between a rock and a hard place, despite its impressive comeback.
But something will have to give soon. But for now, trading the ranges will remain the dominant theme. If investors start to believe that an aggressive Fed policy will mean inflation will be snuffed out quickly, then it will not have to tighten too much down the line. This may be one explanation behind the yields drop, and what might support gold going forward, although I am not entirely convinced by this logic just yet.
Either way, let’s see if gold will manage to break through THIS key resistance area circa $1800 or run into selling pressure again:
Source: ThinkMarkets and TradingView.com
Here, the 200-day average meets the shorter-term bearish trend line, the point of origin of the prior breakdown and the mid-point of the 61.8 to 78.6% percent Fibonacci retracement levels. The confluence of several technical levels makes $1800 a key technical zone.
Whatever happens here, this should lead to further follow-through in that direction. A clean breakout could pave the way towards $1835/45 area, which is the next key resistance zone, while a breakdown could see prices go down to support levels at $1781 and then $1770, before deciding on the next move.