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Gold Rally Could Faze Out Soon, but Silver's Is Just Beginning

Published 08/04/2024, 10:50
Updated 11/03/2024, 11:10
  • Despite a stronger US jobs report, gold and silver prices surged to new highs, driven by safe-haven demand amidst geopolitical tensions.

  • Silver's breakout above key resistance levels fueled last week's rally, hinting at further potential gains.

  • Gold's overbought conditions may prompt profit-taking, but short-term support levels suggest potential for consolidation around current highs.

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  • There was no further escalation in the conflict between Iran and Israel at the weekend, which saw crude oil and gold prices drop in early Asia trade. But the precious metal’s dip was quickly bought, leading to another rise to a record high of over $2350.

    It will be interesting to see whether the metal will be able to hold onto its gains at these extreme overbought levels without staging a correction first. Gold investors have also been ignoring the strength of US data on the bond market.

    But as yields on government debt ascend, the opportunity cost of holding gold continues to rise from a yield’s perspective, given that the metal is a zero-interest-bearing asset. The risk of a correction is therefore rising.

    Gold again disregards rising yields to hit fresh record

    Precious metals rallied even after the release of a stronger US jobs report on Friday which triggered another hawkish repricing in the bond market.

    Once again, gold and silver traders ignored the rise in Treasury yields as investors trimmed bets on a rate cut in June, and the chances of three Fed reductions this year fell.

    Gold rallied around $40 to hit a new record high and silver extended its weekly advance to around 10% before both metals added more in early Monday trade ahead of the publication of US CPI in the week ahead.

    Friday's robust US jobs report came as a surprise with a headline print of more than 300K. Consequently, the likelihood of a rate cut in June dropped to below 60%, causing bond yields and the US dollar to rise.

    However, these gains were short-lived as the European trading session progressed. Investors likely shifted their focus to the upcoming week, anticipating inflation data.

    While stock markets were recovering a significant portion of the losses experienced on Thursday, the demand for safe-haven assets amid the geopolitical tensions in the Middle East propelled gold to a new record high.

    Additionally, crude oil reached a new peak for the year, with WTI touching $87.00 and Brent reaching $91.00, before dropping back on Monday as investors took profit.

    After the release of a stronger US jobs report on Friday, which prompted another hawkish reassessment in the bond market, precious metals continued to surge.

    Gold soared approximately $40 to establish a new all-time high, while silver maintained its upward momentum, registering a weekly gain of around 10%.

    Both metals continued their ascent in early Monday trading, ahead of the release of US CPI data later in the week.

    Gold and silver technical analysis and trade ideas

    Both precious metals have been in demand, particularly gold, essentially because of years of high inflation chipping away at the value of fiat currencies, which is the same reason why Bitcoin has also been hitting record levels.

    Up until a couple of weeks ago, silver wasn’t finding much love. But stronger industrial data from China earlier in the week pointed to stronger demand for industrial materials like copper and silver.

    • Silver stages big breakout

    Silver’s big rally last week was also fuelled by a technical breakout above key resistance in the $25 area, drawing in momentum traders who had been taking advantage of the other precious metal – gold – in recent weeks.

    But at these levels, both metals appear a little overbought and a bit of a pullback should not come as a surprise.

    That said, the big breakout in silver means traders will be happy to buy the dips moving forward. I am expecting to see more gains for silver this year, particularly because the grey metal has not even reached the highs of its most recent years around $30, let alone its record peak of near $50 that it had hit in 2011.

    Silver Weekly Chart

    In contrast, gold has been hitting repeated all-time highs. Thus, silver has a lot of catching up to do on the upside, and last week’s technical breakout from a multi-year consolidation phase may well be the start of a long bull market.

    I would be looking for potential dips back to the $25-$26 area to be supported. Let’s see if silver will ease back from these levels to get to those levels, as undoubtedly many people have missed this big price spike.

    • Gold’s overbought conditions need to be worked off

    Undoubtedly, gold is looking quite overbought on almost any metric you use. You can see from the sub-chart, the Relative Strength (RSI) is well above the 70.0 threshold, which may mean we could see some profit-taking or consolidation in the week ahead.

    The strong bullish trend means any notable dip could find support. Short-term support comes in around $2300 now, followed by a more important zone around 2222, and then the $2195/2200 area.

    The RSI overbought conditions can be worked off through time, simply if gold were to consolidate around current levels for a few days. This would be the best outcome for gold investors given the metal’s meteoric rise in recent days.

    Gold Daily Chart

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    Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

    Read my articles at City Index

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