Gold and silver break higher with multiple tailwinds at play Gold and silver break higher with multiple tailwinds at play Gold and silver break higher with multiple tailwinds at play

Gold and silver break higher with multiple tailwinds at play

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Gold's six week rally continues and together with silver it has broken through a couple of key upside levels. Driven higher by a weaker dollar, stable Treasury yields, Middle East tensions, raised volatility in cryptos together with a general strong appetite for metals. The latter also impacting copper which following a brief pause trades higher on worries elections in Chile and Peru may reduce mining companies ability to increase production.


What is our trading focus?

Spot Gold (Ticker: XAUUSD)
Spot Silver (Ticker: XAGUSD)
Gold/silver ratio (Ticker: XAUXAG
HG Copper (Ticker: COPPERUSJUL21)

____________________________________________________________________________________________________

Gold’s six week rally continues and during the past couple of days it has broken a couple of key levels, most noticeable the 200-day moving average and the downtrend from the August 2020 high. It is however also worth noting that since March when the month long slide culminated in a double bottom at $1677/oz, gold has on a number of occasion had silver to thank for being able to penetrate key resistance levels. The most critical being the break above $1800 and yesterday’s rally above the mentioned downtrend.

Silver has since the early April low outperformed gold by 7% with the gold-silver ratio falling from above 70 ounces of silver to one ounce of gold to the current 65.50. Some of that additional support for silver deriving from its industrial link to surging industrial metals such as copper and zinc.

The current rally is being supported by multiple developments with the most important being a weaker dollar and stable US Treasury yields. The latter hiding the fact that rising inflation concerns have seen the 10-year breakeven yield reach an eight year high at 2.56% while the real yield with its often strong inverted correlation to gold has slumped back down towards -1%. In addition to this we have Asian virus woes, Middle East tensions and very high crypto volatility denting this novice sectors store-of-value credentials.

For the rally to extend beyond current levels, U.S. economic data needs to continue the recent downward trajectory. While not reducing gold supportive inflation pressures a corrective period of the U.S. data cycle should continue to hold down U.S. Treasury yields while adding downward pressure on the dollar.

18olh_met1a

While the current recovery in precious metals began more than six weeks ago, investment flows via bullion-backed exchange-traded funds only turned positive this month with Bloomberg reporting total inflows of 24 tons during the past couple of weeks. From the peak last October to the latest through, total holdings slumped by 377 tons to 3,090 tons. Money managers, who tend to be early movers, also took their time before turning accelerated buyers. Having spent eight weeks since March 9 increasing their net long by 24k lots (2.4 million ounces), they responded to the improved technical outlook by adding 29.5k lots in the last reporting week to May 11, a 45% increase to a 13-week high.

Technical comment on gold (XAUUSD): The yellow metal has now been trading within an uptrend since early April and the accelerated rally since last week’s strong U.S. inflation and weak retail data has resulted in a break above its 200-day moving average ($1845) and 61.8% retracement of the January to April sell-off. The next key upside level of interest being channel resistance and more importantly the 50% retracement of the August to April sell off at $1876. A break higher could see it challenge $1922 next with support at the mentioned $1845 area followed by channel support at $1805.

 

18olh_met1
Source: Saxo Group

Technical comment on silver (XAGUSD).  In an uptrend since early April with support at the 21-day moving average ($26.80), silver has taken off during the past few sessions to briefly accelerate above its channel ceiling, potentially a sign that a retest of $30 has become more likely. In the short-term it may experience some resistance at $28.90 while trying to establish support, potentially in the $28.30 area.

18olh_met2
Source: Saxo Group

Copper trades higher and sits just 2.5% below the record from last week with the price continuing to find strong support from the prospect for a strong rebound in global growth and demand together with the green transformation focus. The combination of rising demand and inelastic supply has already seen the price almost double during the past 12 months and given recent developments in South America potential supply issues may become an even bigger source of support during the coming months and years.

This after the recently held Chilean election left power largely in the hands of the left wing. They have proposed a progressive rising tax on Chilean copper sales to a maximum of 75%, a proposal that potentially could be copied by the leading Presidential candidate in Peru. Together these two countries account for around 40% of global supply and mining companies have already warned that such a transfer to the state would leave them struggling to meet future supply growth expectations.

Technical comment on HG Copper (COPPERUSJUL21)After recently reaching 200% of the triangle height formed in March/April the price spent the last week looking for support, something it found at $2.65, the former record high from 2011. Following a minor correction it is likely to make new highs to possibly reach $5.10.

18olh_met3
Source: Saxo Group

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.