Near Term Top In Gold And Silver (Technical Analysis) (Commodity:XAUUSD:CUR)

I have been a pretty ardent and optimistic bull on precious metals since February, where I wrote in “Gold And Miners At Key Breakout Level (Technical Analysis)” that gold (XAUUSD:CUR) (GLD) was likely to launch an imminent assault on the $2,100 level.

Then, gold was trading at $2,031. In a short span of 2 weeks, gold took out the $2,100 target, which paved the way for it to rise to as high as $2,431 a month later.

Now, looking at the recent price action, I believe precious metals have topped out for the near term, and gold could see a pullback to the $2,100 level again.

The first observation I made was the negative divergence in the price action of gold and silver (XAGUSD:CUR) (SLV) versus the news.

Geopolitical tensions in Israel and Iran should theoretically be a fundamental catalyst for precious metal prices to rise further, in a flight to safe haven assets.

But the market does not always work this way. As I have written extensively before, the market is a discounting mechanism. This means that price tends to run ahead of news. In some sense, price action has an uncanny ability to sniff out the news, which tends to appear later.

Notice how gold and silver rose in knee-jerk fashion to new all time highs and new 52 week highs respectively on 12 April, when the US announced that it expects Iran to attack Israel in the next 24 hours, before reversing sharply to close at the lows of the day?

Since then, despite an actual exchange of attacks by both Iran and Israel, both gold and silver have failed to take out the 12 April highs. On the contrary, both suffered sharp sell-offs on 22 April in the absence of market-moving developments, with gold falling -2.7% on the day, and silver falling -5.2% on the day.

Daily Chart: XAUUSD

Daily Chart: XAGUSD

The bearish reversals in gold and silver on 12 April, coupled with their sharp sell-offs on 22 April, tells me we are seeing significant overhead supply at current levels. Throw in the backdrop of geopolitical tensions, which precious metals should be thriving in, and we may come to the conclusion that recent price action is a big tell that we are likely to see lower prices in the coming weeks.

In the daily charts of gold and silver I posted above, both markets are testing minor uptrend support lines. We may see a shallow bounce or consolidation at current levels, but I do expect these uptrend lines to break in the coming days.

In another new development that could adversely affect precious metal prices, the US 10 year yield has broken out higher from a consolidative wedge pattern. Bond yields and precious metal prices have a strong inverse correlation, and I expect higher yields to put pressure on gold and silver. It is uncommon to see both bond yields and precious metals rise in tandem.

Daily Chart: US10Y Yield

I give added weight to this breakout in bond yields, primarily because the market is expecting the Federal Reserve to embark on a rate cut programme this year, but firm inflation numbers have dampened the Fed’s resolution to lower rates too quickly, as communicated by Powell a week ago.

This sudden U-turn could catch the market by surprise, given that the central bank had been preparing the markets for a series of rate cuts since late 2023.

If gold gets pressured lower, I will be a buyer. That is because on a longer time frame, gold has broken out of a massive 3.5 year consolidative base, so the long term trend is up. I am looking for a retest of the $2,100 breakout zone, which is roughly -10% lower from here.

Weekly Chart: XAUUSD

Is that too pessimistic? Given how gold fell -2.7% on one day alone on 22 April, and how it saw a -3.6% intraday day reversal on 12 April, I think this target can be achieved. Furthermore, bulls would arguably have piled in after seeing news on geopolitical tensions.

For silver, I am targeting the convergence zone where the 50 week moving average and 200 week moving average both reside, which is somewhere around the $24 level, or -12% from current levels. A drop back within the wedge pattern it broke out from would likely scare away many bulls, and cause many holders to capitulate. If so, that would be an attractive opportunity to buy in.

Weekly Chart: XAGUSD