Interest Rates Evolution and Support Levels I am a little skeptical about that at the moment, but if we see good news coming out of the Middle East, or some type of either peace or just acknowledgment that even more oil is flowing, then we have a situation where interest rates probably drop due to energy inflation being less of a concern, and that could push gold higher.
That is the main problem with gold right now: we have rising rates, and non-yielding assets tend to suffer in that environment. If we do break down below this trend line, then the next very interesting place to me, of course, is $4,000. It is a large, round, psychologically significant figure that has been support previously and is good for headline traffic as well as options.
I think at this point in time, we are starting to see a little bit of a recovery. Whether or not it has any lasting power to it could very well be determined by the bond market.
Japanese officials warned about the yen's undervaluation. That, along with coordinated messaging from the US, pushed the yen up nearly 1% against the dollar, even as the broader DXY index held above 101. The yen's recent strength appears driven by an increased risk of intervention, not a classic flight to safety. Meanwhile, Treasury yields and rate differentials still favor the dollar. The yen could strengthen further in the near term if Tokyo maintains its verbal pressure. The US dollar has gained ground over the past two weeks. Higher US Treasury yields and persistent inflation worries are keeping the US Dollar Index (DXY) above 101.
The USD/JPY exchange rate, however, has recently bucked that trend. The Japanese yen gained almost 1% in just two trading days, sending USD/JPY from recent highs near 158.80 to roughly 157.15.
This divergence warrants close attention as it appears to be a significant market movement and is not simply noise.
Why the Dollar Keeps Climbing Several factors are boosting the dollar’s overall strength. They include high US Treasury yields, oil prices above $107 a barrel, and growing expectations for more Federal Reserve rate hikes. These have helped the DXY near its best monthly performance since June, with a projected 1.7% gain for September.
Fed Governor Lisa Cook recently reinforced a hawkish outlook. She suggested that productivity gains from artificial intelligence likely won’t be enough to counter immediate inflation pressures. Meanwhile, MUFG sees 101.80 as the dollar’s next resistance level.
At the same time, Japanese officials are talking more about the yen’s value. Both Finance Minister Satsuki Katayama and currency official Atsushi Mimura have called the yen’s undervaluation a concern.
They’ve pointed to recent talks between Prime Minister Sanae Takaichi and US President Donald Trump, along with conversations with Treasury Secretary Scott Bessent, as signs that both sides share concerns about currency levels.
The yen’s recent strength looks like it’s more about potential official intervention than just interest rate gaps. Japan has intervened by selling dollars before, and officials hint they might do it again.
What this Says About Risk Appetite A stronger yen usually points to investors moving away from risky assets, as it’s considered a safe haven. But this time, its rise feels different.
It’s not linked to falling stock markets or a broad rush for safety. Instead, it mainly comes from official statements and the chance of intervention specifically aimed at USD/JPY.
This suggests policy is driving the yen’s move, not a change in overall market risk appetite. The dollar’s continued strength against other major currencies, like the euro and pound, indicates that general market sentiment hasn’t really turned cautious.
The Yen Will Struggle to Hold On to Gains The yen could see more gains in the near term. If Japanese officials continue to voice worries about its undervaluation, or if their US counterparts support a stronger yen, USD/JPY might stay under market pressure.
Also, if the Bank of Japan speeds up its rate increases, that would help close the yield gap with other economies, which would support the yen.
Still, the core reasons for the dollar’s strength persist. Strong US economic data and the Federal Reserve’s probable additional tightening mean a notable interest rate difference will likely remain.
So, for USD/JPY to extend the decline for longer, we’d likely need a clear policy change from Japan, or a major downturn in market sentiment that triggers a broad unwinding of carry trades.
Why has the yen strengthened while the DXY remains firm above 101?
Japanese officials warned against further yen weakness. This raised intervention risk and prompted short covering in USD/JPY, even as the broader dollar gained ground.
What role do US-Japan discussions play in the recent move?
Comments from Prime Minister Takaichi and Treasury Secretary Bessent about the yen’s undervaluation fueled market expectations. They suggested coordinated policy pressure would back the currency.
Does the yen’s gain signal a broad decline in risk appetite?
Not really. Equity markets aren’t showing crisis conditions. Instead, the yen’s move seems driven more by policy than a typical flight to safety.
Silver tests the key $60 support zone as U.S. rates begin to ease, potentially creating conditions for a bounce while longer-term demand remains supportive.
Silver Technical Analysis
Daily candlestick chart of Silver showing a pullback toward the key 60.00 support zone below the 50-day and 200-day EMAs. Silver dropped to kick off Tuesday’s session, gapping lower as the market continues to see noise coming from the interest rate markets more than anything else. This is true with most markets at the moment, as we are looking to see where we are going there and extracting that information in the markets to price assets such as this one.
Ultimately, this is a market that is very sensitive to interest rates rising, just as it is sensitive to interest rates falling. We are starting to see interest rates in the United States calm down a little bit, and that certainly helps silver’s case here to turn things around.
A Big Figure I Am Watching The $60 level is an area that I think a lot of people will be watching. The $60 level is a large, round, psychologically significant figure, and an area that a lot of people would watch to see if there is any reaction. It had previously been a consolidation area as well.
With all of that being said, this is a market that I believe will perhaps at least offer the opportunity for a bounce. But if we can get some type of cooling of interest rates, then that opens up the possibility of a confluence that could send this market bouncing.
Longer term, I do like silver. There is a major need for silver for the electrification of the economy, and, of course, production is not picking up. While longer term I do like silver, I do think at this point in time it is all about rates, and rates are moving on the latest war headlines.
If you’d like to know more about how to trade gold and silver, please visit our educational area.
Chris is a proprietary trader with more than 20 years of experience across various markets, including currencies, indices and commodities. As a senior analyst at FXEmpire since the website’s early days, he offers readers advanced market perspectives to navigate today’s financial landscape with confidence.
TL;DR: Gold and Silver both sold off as the U.S. 10-year yield surged to a fresh multi-decade high near 5.232%, but BMO Capital Markets’ new long-term forecasts show Silver trading nearly 30% above its structural anchor of $47, versus Gold sitting just 4% above its $4,000 anchor—leaving Silver far more exposed to a premium unwind.
Why This Matters Gold and Silver are reacting to the same macro shock this week, but the size of the reaction is revealing something the yield move alone cannot explain. When two assets face an identical headwind and one falls considerably harder, the difference usually comes down to how much valuation cushion each was carrying going in. BMO’s latest research quantifies that cushion directly, and the gap it finds between Gold and Silver is large enough to reframe this week’s selloff as more than ordinary high-beta behavior.
For traders watching the Gold/Silver ratio and positioning across the precious-metals complex, that distinction matters for how much further Silver’s underperformance could run, and what would confirm or invalidate the thesis from here.
The Same Yield Shock, but a Very Different Valuation Gap Gold and Silver are being hit by the same macro force this week: U.S. Treasury yields have surged again, lifting the opportunity cost of holding non-yielding assets and extending pressure across the precious-metals complex. But the reaction is exposing an important difference between the two metals.
The U.S. 10-year yield has climbed to around 5.232%, a fresh multi-decade high. Gold and Silver both sold off sharply as that move accelerated, but Silver again absorbed the larger hit. On Monday, spot Gold fell around -3.3% to 4,145.88, while Silver dropped close to -5% to 61.11. Silver miners fell harder again.
Part of that is normal—Silver routinely behaves as the higher-beta precious metal. But BMO Capital Markets’ latest forecasts suggest there may be more behind the divergence. Its new long-term Gold assumption of $4,000 an ounce sits only around 4% below current spot near 4,147. Silver’s new long-term assumption of $47, by contrast, is nearly 30% below current prices around 60–61 when measured as Silver’s premium above BMO’s anchor.
That does not make BMO’s numbers objective fair value. But it does expose an important asymmetry: Silver is carrying much more premium above the level BMO believes can be sustained structurally. And unlike Gold, part of the fundamental tightness supporting that premium is beginning to ease.
BMO Cuts Silver Harder for a Reason The near-term forecast revisions tell the same story. BMO trimmed its Q4 Gold forecast by only around 2%, from $4,750 to $4,650. Its Silver forecast was cut much more sharply, by around 5.6%, from $71.40 to $67.40.
The reason is specifically Silver-related. BMO points to “faster-than-expected thrifting and slower solar deployment” as factors loosening industrial-market balances. Solar manufacturers are reducing the amount of Silver required in each cell through narrower metallization lines, increased copper substitution and wider use of silver-coated copper pastes.
That matters because industrial scarcity has been an important part of Silver’s 2026 re-rating. If manufacturers can reduce Silver intensity faster than expected just as deployment growth slows, one of the assumptions sustaining the metal’s scarcity premium weakens. BMO’s conclusion is unusually direct: it expects Silver to “underperform gold over the coming quarters.” That is not a call for Silver to collapse. It is a relative-value call.
Gold Is Near Its New Anchor. Silver Is Nearly 30% Above Its Own. The longer-term forecasts make the distinction even clearer. BMO raised its long-term Gold assumption from $3,100 to $4,000, a 29% increase. Silver’s assumption rose from $36 to $47, an increase of roughly 31%. At first glance, the upgrades look almost identical. Relative to current prices, they are not.
Gold around 4,147 trades only about 4% above BMO’s $4,000 long-term anchor—in effect, BMO’s revised structural framework already accommodates most of Gold’s current price. Silver around 60.6–60.9 remains almost 30% above BMO’s $47 anchor.
That gap is where the premium-unwind thesis comes from. It suggests that a much larger share of current Silver pricing still relies on conditions remaining unusually tight—scarcity, physical-market stress, industrial demand and squeeze dynamics—while Gold is already much closer to the structural level BMO now regards as sustainable. So when yields rise, Silver has more than just rate sensitivity to contend with. It also has more premium available to compress.
This Is Not a Bear Call on Precious Metals There is an important counterargument. BMO has raised the long-term assumptions for both Gold and Silver substantially. The broader structural case for precious metals remains intact in its framework, supported by themes including monetary debasement, central-bank demand and continued accumulation by the PBoC. BMO has also argued that Gold is increasingly decoupling from traditional real-yield relationships, suggesting that structural demand is changing how the metal responds to rates over longer horizons.
That means the current thesis should not be reduced to “Gold good, Silver bad.” The argument is narrower:
Both metals can retain strong long-term structural support while Silver simultaneously gives back more of the premium accumulated above its new long-term equilibrium assumption.
The distinction matters because the Gold/Silver ratio is now beginning to test exactly that proposition.
ActionForex’s Technical View on the Gold/Silver Ratio and Silver
The Gold/Silver ratio has risen back to around 68.31 after repeatedly finding support near the 64.65–64.98 area. That support zone is technically important—it sits around the 38.2% retracement of the rally from 52.72 to 72.55, while the medium-term rising trendline has also remained intact. The ratio has now pushed through the upper boundary of the shorter-term descending structure from 72.55, suggesting that the corrective decline may have ended at 64.65. But the reversal still needs confirmation.
The market now has a clear progression of levels to watch:
68.64 tests whether the short-term reversal is genuine, with the weekly 55 EMA around 69.26 providing a second hurdle immediately above. 72.55, the previous swing high, tests whether Silver underperformance has enough momentum to extend. 75.28, the 50% retracement of the much larger decline in the ratio from 107.00 to 43.57, tests whether something larger is changing. Why 75.28 Matters More Than the Next Few Sessions That last level is a very different technical threshold from 68.64. A move back through 75.28 would imply that Gold’s relative recovery against Silver is no longer merely a short-lived response to a yield spike, but a more meaningful repricing of the relationship between the two metals—one that would fit BMO’s fundamental view particularly well. If industrial Silver tightness continues to ease while Gold remains supported by central-bank demand and broader monetary themes, the ratio should eventually reflect that divergence. The ratio is therefore not merely another technical chart in this piece; it is the market test of the relative-value thesis.
Silver Breaks 62.30 as Downside Structure Extends Silver’s own chart is already showing more damage. The fall from 71.16 resumed decisively this week and broke below 62.30 support. Price is also below both its daily and four-hour 55 EMAs, while momentum remains negative. Near term, 63.04—previously support—is the key resistance; as long as rebounds remain capped beneath it, the current decline remains in force.
58.68 Separates Correction From Something More Serious The next major downside objective is 58.68, the 100% projection of the 71.16–62.30 decline measured from 67.54. That level also sits close to the lower boundary of the broader descending structure, increasing its technical significance. The reaction there will determine whether Silver is simply unwinding its latest rebound or resuming a larger downtrend. If the fall from 71.16 remains corrective, strong support should emerge around 58.68 or above, ideally accompanied by stabilizing momentum or bullish divergence—keeping open the possibility that Silver is merely retracing part of the August advance before another recovery attempt.
A decisive break below 58.68 would carry a different message, exposing the 54.77 July low and then the 53.20 area, the 161.8% projection of the current decline. At that point, the premium-unwind argument would have moved beyond relative underperformance and into outright structural deterioration.
Three Signals Will Decide Whether the Premium Unwind Has Further to Run The coming weeks offer three relatively clean tests.
First, watch the 10-year Treasury yield—the move is already stretched, and signs of exhaustion there would ease pressure on both metals and could slow Silver’s decline. Second, watch 58.68 in Silver: holding it would preserve the corrective interpretation, while breaking it would materially increase the risk of a return toward 54.77 and 53.20. Third, watch the Gold/Silver ratio: a move above 68.635 would strengthen the immediate reversal, a break of 72.55 would make the underperformance more significant, and a later move through 75.28 would provide the strongest confirmation that Silver’s relative premium is undergoing something more substantial than a one-quarter reset. The rates shock is common to both metals. The amount of premium they are carrying into it is not. And on BMO’s numbers, Silver still has considerably more to lose.
Key Takeaways Gold and Silver both sold off as the 10-year Treasury yield hit a fresh multi-decade high near 5.232%, but Silver fell nearly -5% versus Gold’s -3.3%. BMO’s new long-term anchors show Gold just 4% above its $4,000 fair-value estimate, while Silver trades nearly 30% above its $47 anchor. BMO cut its Silver forecast more sharply than Gold’s, citing faster industrial thrifting and slower solar deployment easing the metal’s scarcity premium. The Gold/Silver ratio has reclaimed 68.31; a break above 68.635, then 72.55, then 75.28 would each progressively confirm the Silver-underperformance thesis. Silver has broken 62.30 support and targets 58.68 next; a clean hold there keeps the decline corrective, while a break exposes 54.77 and 53.20.
ActionForex
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The Pound-Canadian Dollar could remain supported if BoE hike bets persist, although stronger Canadian growth and firm oil prices may lift the Loonie. The Pound Canadian Dollar (GBP/CAD) exchange rate strengthened on Monday as soaring UK diesel prices fuelled Bank of England (BoE) interest rate hike bets.
At the time of writing, GBP/CAD was trading at CA$1.8772, up 0.2% on the day.
Latest — Exchange Rates:
Pound to Canadian Dollar (GBP/CAD): 1.878388 (+0.29%)
Euro to Canadian Dollar (EUR/CAD): 1.61084 (0.00%)
Dollar to Canadian Dollar (USD/CAD): 1.41718 (+0.23%)
DAILY RECAP:
The Pound (GBP) strengthened on Monday as UK diesel prices rose to a record high, fuelling bets that the Bank of England will tighten monetary policy in the coming months.
Diesel was selling at 199.18p per litre on average in forecourts across the UK on Monday, exceeding the all-time high struck in June 2022 following Russia’s invasion of Ukraine.
High diesel prices tend to feed through into the wider economy, as businesses offering goods or services that rely on diesel vehicles for transportation will likely increase prices to offset the rising cost of fuel.
As a result, the likelihood of higher inflation saw investors bet on a more hawkish approach from the BoE.
Meanwhile, the crude-linked Canadian Dollar (CAD) found some support on Monday as oil prices crept higher.
The US rejected Iran's peace proposal over the weekend, which would have reopened the Strait of Hormuz – a vital waterway for oil tankers – with this latest development pushing up oil.
However, while Brent crude climbed to $108 per barrel, reapproaching the multi-month highs reached earlier in September, WTI crude saw a more modest upswing. The North American benchmark remained around $10 below its early-September high, limiting the support for the Canadian Dollar.
Near-Term GBP/CAD Forecast: Canadian GDP to Support the ‘Loonie’? Looking forward, Canada’s latest GDP data is the focus on Tuesday. July’s final data is expected to confirm that growth stalled, while markets are anticipating a recovery in August, according to the preliminary figures. If the data prints as expected, CAD could receive a boost.
Meanwhile, oil price dynamics will likely continue to have a large influence on the ‘Loonie’. If continued pessimism about the Middle East crisis keeps crude prices elevated, the Canadian Dollar may attract support.
As for Sterling, UK data is thin on the ground on Tuesday, leaving GBP investors to focus on domestic news. Any headlines coming out from the Labour Party Conference could impact the British currency.
Additionally, Bank of England policymaker Alan Taylor is due to deliver a speech, with his comments potentially impacting the Pound. Any dovish remarks may dent GBP.
Exchange Rates UK Research Our currency coverage draws on live market data, official economic releases and published bank research.
The Rising channel and higher lows should continue to push the index higher in the near term, but should it break support at 100.67, the trend would likely be in question. Conversely, an upside break and daily close above 101.40 should have a high probability of bringing 101.65 and 101.89 into the equation in the near term.
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GBP/USD Technical Analysis: Sterling Holds 1.3205 as 1.3250 Remains the First Recovery Hurdle
EUR/USD Price Chart – Source: Tradingview The EUR/USD pair is currently trading at 1.1362, and is showcasing further signs of weakness after recently sliding beneath the 1.1325 support zone. Below both of the moving averues, and in a lower high formation, the pair has further potential to the downside, and could still be in a short term formation.
I will be looking for the first significant level of resistance to be near the 1.1412 level. If the pair is able to rise above 1.1412, further resistance may come in near 1.1455, 1.1504 and 1.1558 respectively. If current support at 1.1325 is broken, further support may come in near 1.1266 and 1.1211.
While RSI has been showing some bullish signs near oversold territory, I believe further downside may be limited at the current time. If current support is broken, I may gain a bearish bias near 1.1266. I would gain a bearish bias near 1.1412 if it is tested and broken, and would need to see a bullish move above 1.1455 to negate my current bearish bias.
Late last week, St. Louis Fed President James Bullard commented that he would like to see interest rates remain above the 3.25% range, and also reiterated his preference for a restrictive policy for longer than the market is currently implying. On Monday, Fed Governor Cook said she expected additional inflation in the near term due to the recent rise in oil prices and the potential for strong artificial intelligence (AI) related economic activity.
According to Cook, the AI-related inflationary pressures could last for a prolonged period. Federal Reserve officials will speak throughout the week, and a number of key economic reports are scheduled for release, which will be market moving, and likely influence the Fed’s rate decision in October.
The stresses in the bond market are accelerating. The U.S. benchmark yields have been at levels not seen since before the 2008 Financial Crisis. The U.S. dollar is also near its highest level of 2020. Both of these factors lead to a decreased opportunity cost of investing in riskier assets and increase the opportunity cost of holding bullion.
Usually geopolitical risks provide a bid for gold, but the risks of inflation due to geopolitical risks, for example the possible disruption of oil supplies from the U.S. and Iran, work against a bid for gold.
The federal funds rate and inflation expectations became less dovish on Monday. This rate expectations along with other monetary policy expectations caused a sell off in both gold and silver.
From a fundmental viewpoint, expectations of higher rates and inflation work against gold and silver. The U.S. personal consumption expenditure and employment report due out on Friday will be important events for the near-term price outlook for both gold and silver.
Pound-Dollar could stay supported if BoE hike bets continue to build, while softer US labour data may limit demand for the Dollar.
The Pound US Dollar (GBP/USD) exchange rate attracted support on Monday as UK diesel hit an all-time high, boosting Bank of England (BoE) interest rate hike bets. However, gains were limited in scope.
At the time of writing, GBP/USD was trading at $1.3250, having briefly touched a five-day high.
Latest — Exchange Rates:
Pound to Dollar (GBP/USD): 1.325578 (+0.07%)
Euro to Dollar (EUR/USD): 1.136623 (-0.23%)
Dollar to Yen (USD/JPY): 157.44139 (+0.10%)
DAILY RECAP:
The Pound (GBP) climbed on Monday as UK diesel prices reached a fresh record high, prompting markets to price in a greater chance of tighter monetary policy from the Bank of England in the months ahead.
Average diesel prices at UK forecourts rose to 199.18p per litre, surpassing the previous record set in June 2022 after Russia’s full scale invasion of Ukraine.
Elevated fuel costs can have a broader impact on inflation, particularly as businesses that depend on diesel-powered vehicles for transport may raise their prices to absorb higher operating costs.
With the prospect of stronger inflationary pressures in view, markets increasingly anticipated a more hawkish stance from the BoE.
Meanwhile, the US Dollar (USD) attracted modest support on Monday as the latest reports about the Middle East crisis prompted some caution among investors.
Over the weekend, the US rejected a peace proposal from Iran, which would have reopened the Strait of Hormuz in seven days. After rejecting the deal, President Donald Trump said he expected negotiations to resume soon. However, Tehran pushed back on these claims.
US-China trade news offer investors some hope, however, meaning the market mood wasn’t decisively risk averse. Following in-person talks between President Trump and Chinese President Xi Jinping last week, the two sides released lists detailing around $30bn each in tariff cuts that could boost Sino-American trade.
Near-Term GBP/USD Forecast: Mixed US Data to Mute the Dollar?
Looking forward, Tuesday brings the latest US Job Openings and Labor Turnover Survey (JOLTS). A slight decline in new vacancies could mute USD.
Meanwhile, a forecast uptick in US consumer confidence in September could support the ‘Greenback’. However, if intensifying Middle East tensions and expectations for higher interest rates unexpectedly dented consumer morale last month, USD could stumble.
For Sterling, the UK economic calendar is light on Tuesday, leaving domestic developments in focus. Headlines from the Labour Party Conference could therefore influence the Pound.
Bank of England policymaker Alan Taylor is also scheduled to speak, with his comments potentially shaping expectations for GBP. Any dovish signals could put further pressure on the currency.
Exchange Rates UK Research
Our currency coverage draws on live market data, official economic releases and published bank research.
GBP/USD declined toward 1.3200 before the bulls emerged. A bearish trend line is forming with resistance at 1.3290 on the 4-hour chart. Gold prices weakened and traded below $4,200. WTI Crude Oil started a consolidation phase below $100.00. GBP/USD Technical Analysis The British Pound gained bearish momentum below 1.3250 against the US Dollar. GBP/USD even tested the 1.3200 zone before it found some support.
Looking at the 4-hour chart, the pair settled below 1.3300, the 100 simple moving average (red, 4-hour), and the 200 simple moving average (green, 4-hour). A low was formed at 1.3204, and the pair started a consolidation phase.
If there is a recovery wave, the pair could face resistance near the 1.3280 level. There is also a bearish trend line forming with resistance at 1.3290. The trend line is close to the 23.6% Fib retracement level of the downward move from the 1.3568 swing high to the 1.3204 low.
A close above the 1.3290 resistance could start a decent recovery wave. The next major hurdle might be 1.3345. The main resistance could be 1.3420 and the 100 simple moving average (red, 4-hour).
A close above 1.3420 could start another steady increase. In the stated case, the bulls could aim for a move to 1.3480. If there is no recovery wave above 1.3290, the pair could start a fresh decline. An initial support sits at 1.3220.
The first major support might be 1.3200. A close below 1.3200 might accelerate the decline. In the stated case, the bears could aim for a move to 1.3150.
Looking at Gold, the bears gained strength, pushed the price below $4,200, and might aim for further downside.
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US Housing Price Index for July 2026 (MoM) – Forecast +0.1%, versus 0% previous. S&P/Case-Shiller Home Price Indices for July 2026 (YoY) – Forecast +2.2%, versus +2.1% previous.
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Gold’s 4.01% slump ranked 88th-largest since 1968
US 10-year real yields hit highest since 2008
Four-hourly gold indicators now show extreme oversold conditions
$4,115 support in focus
Precious metals washout ranks among the largest on record
It was a brutal start to the week for gold and the broader precious metals complex, with massive losses seen that ranked right up there among the largest in history.
Gold slumped more than 4%, silver more than 5%, while platinum and palladium fell nearly 3.5% and 5% respectively. For gold, it was the 88th-largest daily decline in a dataset going back to 1968, with the moves in the other metals not far behind.
Source: LSEG
US real yields surge to levels not seen since 2008
As discussed in a separate analysis note released in early Asia on Monday, the current macro environment is extremely hostile for metals that offer no yield, have holding costs if held in physical form, and are predominantly priced in US dollars.
That point is reinforced by what’s happening in US real yields. While there’s currently no especially strong short-term correlation between real yields and gold, stepping back from the day-to-day relationship gives a pretty stark picture.
Source: LSEG
US 10-year real yields, which represent the yield investors can receive over and above the market’s expected average inflation rate over the coming decade, have surged to 2.85%. That’s the highest level since November 2008 and the 22nd-highest daily close in data going back to 2003. The speed of the move has also been extreme, with real yields rising 51 basis points over the past 20 sessions after already starting from historically elevated levels.
Macro remains hostile, but gold is stretched to extremes
Even allowing for the fact that signals from TIPS can be muddied somewhat by the legacy effects of the Fed’s previous quantitative easing programs, it’s difficult to look at that kind of risk-free real return and make anything other than a bearish fundamental case for precious metals, and arguably broader risk assets.
For gold specifically, the question is obvious. When investors can receive nearly 3% in real terms from the US government, how does what has long been perceived to be a safe-haven that offers no yield and is predominantly priced in dollars compete?
When you evaluate the answer, it’s not hard to see why gold is struggling in this environment.
Six prior episodes offer a clue on what may come next
Gold is getting hammered, and arguably for valid, solid fundamental reasons. But macro is one thing, and being extremely oversold is another.
While there’s no evidence of a looming release valve to alleviate the pressure on the precious metals complex, history suggests the prospect of a savage counter-trend rally is not out of the realms of possibility.
Gold on the four-hourly chart has now got an extreme RSI (14) reading, while the ATR 50 stretch indicator is also extreme. The price was also trading beneath the lower Bollinger Band into the latest close.
Looking visually at the chart, I couldn’t help but notice that when we’ve seen similar conditions in the past, we’ve often seen some pretty big bounces.
So rather than just eyeballing it, I decided to go through the data and back-test what actually happened following previous periods when gold had reached similarly oversold conditions.
Source: TradingView
For the back-test, I kept the criteria simple and fixed. I looked for previous four-hourly periods where RSI (14) was below 30, the ATR 50 stretch indicator was below -4, and gold was trading beneath the lower Bollinger Band.
Using those conditions, there were six previous independent episodes in the available history. Of those, gold was higher 24 hours later in four of the six episodes, with the same also seen after 48 hours. By 72 hours and 120 hours, however, it was higher in five of the six.
The obvious exception was March this year, when the liquidation simply kept going and gold continued to unwind. While each large-scale selloff has its own characteristics, that episode was unusual in and of itself, coming after gold had experienced arguably one of the more extreme speculative rallies seen in modern times, taking it to a record high of $5,500 an ounce before the air was let out of the move.
So while that provides a cautionary tale that historic tendencies do not always play out, when you look more broadly, the scope for a near-term bounce against the prevailing trend may be in play.
$4,115 becomes the immediate line in the sand
Source: TradingView
Such was the ferocity of Monday’s breakdown that not only the first but also the second of the two downside targets discussed yesterday were hit, leaving the price dangling just above support at $4,115 an ounce.
That now becomes the immediate focal point for anyone trading gold. Should the prevailing trend extend further, $4,070 an ounce is the next downside level of note, coinciding with an area that acted as both resistance and support in late July and early August this year. Beneath that, a more pronounced support zone kicks in below $4,000, with $3,996, the swing low set in late July, marking the top of the range down to $3,943, the low hit earlier this year.
However, should we see a countertrend bounce form from $4,115, there is scope for the move to push back towards $4,165, the swing high set in late July this year, with $4,220 the next level of note.
A rebound back to that level would likely require some form of major macro news that erodes at least some of the pressure that has been hitting precious metals through higher yields and a strengthening dollar.
EUR/USD and USD/JPY traders may be experiencing something of an identity crisis right now, wondering whether they're actually trading crude oil futures rather than FX markets, with an incredibly tight link evident between gyrations in energy markets, US yields and broader FX movements.
