Gold and Silver Breaking Down to Nearly 2-Month Lows – What Next?

While gold typically rallies when political/social/economic uncertainty rises, the falling probability of additional fiscal stimulus from Congress is weighing on the yellow metal today.

Gold 5

Markets are in turmoil to start the trading week on fears of another COVID-19 lockdown in the UK and concerns about the prospects of more stimulus from the US with the focus shifting to the Supreme Court.

While gold typically rallies when political/social/economic uncertainty rises, the falling probability of additional fiscal stimulus from Congress is weighing on the yellow metal today. After all, surging government deficits, combined with unprecedented monetary policy stimulus, have been one of the biggest tailwinds for precious metals so far this year. With Congress now shifting its focus toward what promises to be a bitter nomination battle for a new Supreme Court justice just 43 days before an historic election, direct stimulus checks and (re)expanding unemployment benefits will likely get pushed onto the backburner. The fact that the US dollar is the day’s strongest major currency certainly isn’t helping gold investors either.

Turning our attention to the charts reveals that today’s price action may mark a key medium-term turning point for the precious metals. After spending the last six weeks consolidating in an ever-tightening “symmetrical triangle” pattern, gold is breaking down today. The metal is also on track for only its second close below its 50-day exponential moving average since March, suggesting that the established uptrend is under threat.

Source: GAIN Capital, TradingView

A close here, confirmed by continued weakness tomorrow, would be a sign that the yellow metal may be set for a deeper pullback toward $1836 (the 38.2% Fibonacci retracement of the March-August rally) or $1763 (the 50% retracement) next. Bulls would want to see gold regain its 50-day EMA and ideally close above near-term descending trend line resistance near $1950 before rejoining the uptrend with confidence.

Meanwhile, the technical outlook on silver is similarly downbeat. The grey metal is also breaking down from a consolidation pattern today to trade back below its 50-day EMA. The next bearish targets for silver come in at $22.90 (the 38.2% Fibonacci retracement and previous support/resistance from late July) and $20.75 (the 50% retracement).

Source: GAIN Capital, TradingView

We’ve all seen trends change on a dime throughout 2020, but as it stands, precious metal bulls will need another abrupt change of heart to get the recent uptrends back on track.


More from Gold

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.