Silver lining for precious metals as bond yields dip again

The renewed rally in bond prices could tip the balance in bulls' favour...

Gold and silver prices have been caught between a rock and a hard place, and unable to make a more meaningful comeback despite the recent risk-off trade. But as the metals continue to trade inside narrowing ranges, and with the fundamental backdrop remaining positive for both metals, a potential breakout may be on the cards in the not-too-distant future.

The stock markets have become more volatile in recent weeks and the dollar has likewise been all over the place as investor sentiment has turned a little sour towards risk. Part of the reason for this is that coronavirus cases have spiralled out of control in Europe, triggering lots of new restrictions and raising concerns over the economic recovery. In addition, hopes over a pre-election stimulus package is fading fast in the US.

But heightened concerns over the economic impact of the resurgent virus cases in Europe and elsewhere means inflationary pressures will remain weak. As a result, central banks will likely keep interest rates low for even longer, in order to support the recovery. Underscoring this view, we have already seen benchmark government bond yields drop noticeably again, especially for European countries:

Source: ThinkMarkets and

When bond yields fall, this boosts the appeal of lower-yielding or non-interest-bearing assets. As such, such gold and silver remain fundamentally supported.

Meanwhile silver carved out a nice hammer candle around the support trend of its bull channel on Thursday, potentially suggesting the motion for a potential rally has already started:

Source: ThinkMarkets and

The hammer comes after the grey metal had already formed what could turn out to be a major false breakout reversal pattern: Silver has repeatedly refused to hold below the August low of $23.40 over the past few weeks. A decisive break above the bearish trend line is what the bulls want to see now to potentially trigger fresh technical buying.

Meanwhile, a closing break below the bull channel would probably be a bearish development. If this happens, it will increase the risks for a more significant correction in my view.