Gold prices tumbled by $50/oz after the decision of the US administration to delay some tariffs on the Chinese imports. Is that the end of the rally that has been so impressive? What about silver prices that soared some 20% between the end of May and 13 August? We take a look at those 2 hot markets in this analysis.
Economic situation deteriorates
It is crucial to understand the key driver behind a rally on precious metals and that is darkening outlook for the global economy. Even though monetary policy has been expansive for a long time the pressure mounts on central banks to deliver even more. This pressure drives bond yields lower and low bond yields are good for gold and silver (poor alternative for holding non-interest bearing asset). Now, will Trump decision on tariffs change this outlook? Very unlikely. It may avoid a steep slowdown in the US but with the recent streak of economic data (German&UK economy contracting, Chinese output growth at 17-year low, US business surveys plunging) concerns about global slowdown are likely to persist.
Gold looks a bit stretched
The major issue with gold is extremely high speculative positioning – close to all-time high. That makes prices sensitive to negative news. Having said that we see a continuing build-up in ETF assets and for as long as macroeconomic circumstances remain supportive, this build-up could shore up investment demand.
Positioning on gold is very stretched but investment demand builds up on a regular basis. Source: Bloomberg, XTB Research
Technically we have just seen a regular “overbalance” correction and a trend remains bullish on both D1 and H4 interval. Even if there is larger correction there are so many supports to rely on. We see a beefy zone between $1436 and $1452.
A reaction to “tariff news” triggered only a standard correction on gold. Source: xStation5
Silver – is this a new gold?
Silver fundamentals look more promising. Positioning is relatively high but nowhere near all-time highs. But more importantly silver ETFs are only now looking like they could be gaining momentum and be elevated from niche to mainstream product. ETF demand is already on record levels and rising quickly.
ETF momentum plays important role for price dynamics on silver. Source: Bloomberg, XTB Research
Technically, a rally on silver could be only at the first stage of a move similar to that from 2016. In case this move is matched, we would be looking for a resistance at $21.65. A closer resistance level can be seen at $18.40.
Despite a recent rally, silver prices are still much closer to decade’s lows than highs. Source: xStation5