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Gold and Silver Headwinds: Surging Yields and a Strong Dollar
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Gold and silver were due for a pullback after their January spike. But two bigger forces have been weighing on them lately.
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The first headwind is the jump in Treasury yields. Gold and U.S. Treasury bonds are both “safe havens” during times of market uncertainty. But Treasurys make a coupon payment, while gold does not.
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That’s a big advantage Treasury bonds have over precious metals. With 10- and 30-year yields hitting their highest levels since the early 2000s, the advantage is the strongest in decades.
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The other headwind has been the U.S. dollar. When the dollar weakens, that increases the purchasing power of non-U.S. investors and can drive higher demand.
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A weakening dollar can also lead to fears of currency debasement, which can boost gold and silver. But it works the other way around when the dollar is strengthening against other currencies.
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Since the start of September, the dollar has been making an aggressive move higher and is near its highest level in over a year. The most recent jump in the dollar has coincided with the pullback in gold and silver since late August.
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But things could be about to change. The dollar and rates are starting to reverse at a time when precious metal price support is coming into play…
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The Silver Chart Signal That Could Mark a Bottom
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For gold and silver to recover from the lows seen during the summer, a couple of things need to happen.
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First, the headwinds from rising rates and dollar strength need to reverse. Both interest rates and the dollar look overbought and extended to the upside and are starting to pull back. That should help alleviate the pressure on precious metals.
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We can also look for technical clues that downside momentum is fading, similar to the summer lows. Look at the silver chart for an example of what to watch:
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During the lows over the summer months, silver tested the $56 per ounce area several times. The Relative Strength Index (RSI) made a series of higher lows. That showed downside momentum was fading, which led to a reversal higher.
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Silver is once again testing the same level right as the RSI nears oversold territory. The setup in gold prices is very similar. Ideally, silver and gold will test support while the RSI makes another positive divergence with higher lows.
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That would help set the stage for another reversal higher in precious metals.
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Regards,
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Larry Benedict
Editor, Trading With Larry Benedict
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