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Precious Metals: Stalling, Or Ready To Run Higher?

Michael Brown
Senior Research Strategist
11 Apr 2023
Precious metals have begun to attract increasing attention of late, not least after spot gold once again broke through the psychologically key $2,000/oz mark last week; though, it must be said, that both silver and platinum have also recovered strongly from the lows seen in mid-March. However, with PMs now consolidating around recent highs, traders are starting to ponder whether the rally has run out of steam, or whether the bulls may still have some fuel left in the tank.
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There are, typically, numerous factors that go into the melting pot in determining the direction of any of the three precious metals. To name but a few, these driving forces can include rates, the value of the USD, risk sentiment, inflation expectations, and the level of geopolitical uncertainty lingering in the market. This wide range of factors, coupled with the rapidly changing nature of which is the complex’s primary driver at any one time, creates a constantly murky picture when attempting to produce a market outlook.

Nevertheless, when plotting gold – as an example – against its main drivers, it becomes easier to see that it is, in fact, the softness in the USD which has been the primary cause of the recent rally. Note, on the below chart, how real yields, the DXY, and the S&P 500 are inverted.

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It seems logical to expect that the USD will continue to soften further over the medium-term. Traditionally, there are two reasons to expect a USD rally, either that we are in a time of significant global strife, or that we are in a time where the US economy is vastly outperforming its peers, thus leaving US rates significantly higher than peers as well. Right now, we are at neither of those extremes, leaving us sat in the middle of the dollar smile, thereby producing the stiff headwinds that the greenback continues to face.

Of course, the sell-off in Treasuries stalling out is also helping the PM complex, with the 2-year yield showing little inclination to move considerably north of 4%, and the 10-year also looking unlikely to move back to recent highs. Furthermore, looking ahead, and with the market increasingly leaning towards pricing rate cuts as economic data slowly but surely softens, the balance of risks points to yields continuing to fall from here on in.

Looking at the complex through a technical lens, the price action also looks constructive. Though the $2,000/oz mark is proving a tough nut to crack for gold bulls, price remains well-supported, and continues to respect the (gold) uptrend that has been in place since the March low. While the near-term bull case, and a return to all-time highs, would be threatened by a closing break below this level, the bulls are likely to retain medium-term control of the yellow metal so long as price continues to trade above the well-defended $1,960/oz region.

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The story is similar for silver although, as one would expect, volatility has been considerably higher, in line with the typical dynamics displayed by the two metals. While spot silver has become a little stuck at $25, there is little by way of resistance above this level until the $26 handle, above which the all-time highs again start to come into view. The bulls should remain in control barring a closing break beneath $24.25

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