Undermined by dollar could gold and silver shine again

Owing to a stronger US dollar, buck-denominated precious metals have fallen out of favour again. Both gold and silver currently find themselves in the red for the month of September with just a couple of trading days to go. The precious metals, which pay no dividend nor interest and cost money to store, have been undermined further by rising global bond yields as major central banks have abandoned their zero interest rate policy stances. The Federal Reserve, for one, looks set to raise interest rates one more time before the year is out, with further hikes expected in 2018. Indeed, the Fed’s Chairwoman Janet Yellen yesterday warned that policymakers should be “wary of moving too gradually” in tightening monetary policy, despite soggy inflation. Among other central banks, the Bank of Canada has also started raising interest rates and now the Bank of England looks set to follow suit. The European Central Bank is likely to announce its plan for tapering QE in the Eurozone, this autumn. As a result of tighter monetary conditions, gold in euro and pound terms also find themselves in the red this month.

Can gold make an unlikely comeback?

But despite all of that, can gold make an unlikely comeback? Sure it can. The dollar could very easily weaken again and boost the dollar-denominated precious metal directly. Even if the dollar remains bid, it is not unheard of for both gold and the dollar to go up in tandem, as indicated by the chart of EUR/USD vs. gold, below. After all, gold is gold, right? There is also a risk that the US stock markets could correct themselves due, among other things, to valuation concerns, raised geopolitical risks and the prospects of tighter monetary conditions. If so, this could boost the appetite for safer assets, which include gold and silver. Gold may find additional boost from changes in its physical supply and demand forces. With Indian wedding season, for example, about to start, jewellery demand could easily rise over the next three months or so.  

Gold and silver testing key long-term levels

That being said, gold is currently showing no signs of support. For the second time in as many weeks, the metal is threatening to break the lower bound of key support between $1290 and $1295, an area which was formerly resistance. If the sellers win the battle here, they will still need to push gold below the $1276 level to confirm the bearish reversal, as this level was the last swing low prior to the latest rally. Any potential move below $1276 could pave the way for a significant drop. Meanwhile if the buyers manage to defend their ground around these levels and gold goes on to rise back and hold above $1300 then the bullish trend would re-establish.

Silver, meanwhile, has given up the entire gains made in August and at the time of this writing it was testing the closing price of the July’s range at $16.80. In July, silver flashed crashed before closing the month higher with the formation of a rather bullish-looking hammer candlestick pattern on the monthly chart. If that hammer marked the low for the year then price ‘should’ find support around the current levels, leading to another push higher. However, the metal is obviously below this month’s opening price of around $17.56, so the short-term bias is clearly bearish at the moment. Still, I can’t stress the importance of the $16.80 support level and despite all the negativity out there, I wouldn’t rule out the possibility of a strong bounce here.