Gold and Silver Enter Rare Territory as Breakouts Accelerate

• Gold and silver break long-running downtrends
• Macro headwinds ease as yields, dollar retreat
• Five-day gains unusually high relative to comparable periods
• Momentum indicators continue to favour further upside

Gold and silver have surged over the past week, with the scale of the move far greater than what would typically be expected based on movements in traditional macro drivers. The question now is whether this is merely a bear market rally, or the beginning of a more sustained push back towards the January highs.

Macro Conditions Turn Less Hostile

The latest breakout coincided with an easing in market conditions, providing something akin to a release valve for precious metals after a period of intense pressure. The US dollar index has fallen around 1.7% from its late-July peak, helped in part by the intervention episode involving the Japanese yen. US two and 10-year Treasury yields have also pulled back from recent highs, with the former largely reflecting the retracement in hawkish Fed pricing following the July FOMC.

Source: LSEG, FOREX.com

While debatable as to whether we’ve seen the highs for the big dollar and yields, the pullback likely contributed to the pop in precious metals.

Dollar Correlations Strengthen

As seen in the correlation analysis below, both gold and silver retain an modest inverse relationship with the US dollar and Treasury yields, with the relationship generally strengthening over the past two months relative to longer-term levels.

Source: LSEG, FOREX.com

Over the past 60 sessions, gold’s correlation with DXY stood at -0.50 while silver’s was -0.51, above their respective three-year correlations of -0.39 and -0.30. The relationship with 10-year Treasury yields is also negative, although far weaker at -0.24 for gold and -0.19 for silver over the same 60-day window.

While traditional macro relationships remain in place, what stands out on this occasion is not the direction of the latest move, but its magnitude.

Gold and Silver Deliver Rare Moves

Looking at how gold and silver have typically responded to moves in the DXY and US 10-year Treasury yields across comparable five-session windows over the past three years, what stands out about the this move is just how large it has been.

Source: LSEG, FOREX.com

Gold has surged 8.6% over the past five trading sessions, compared with a model-implied gain of just 0.5%. The resulting macro-adjusted move ranks in the 99.9th percentile of comparable five-session periods over the past three years. Incredibly rare.

Silver has seen an even larger gain of 11.2%, against a model-implied rise of 0.9%, putting its macro-adjusted move in the 96.4th percentile over the same three-year period.

Whether the break of long-standing downtrends after a period of compression, a growing belief among traders that yields and the dollar may have peaked for now, or something else entirely, the scale of the moves have been highly unusual.

Gold Bulls Target 200DMA

Source: TradingView

As written in a separate analysis note on Monday, the next upside barrier to gold’s advance stood at $4,367, a level that had previously acted as both support and resistance. As seen above, the price broke cleanly above it late Monday, touching the 100-day simple moving average before extending the move today.

Those two levels now become the immediate ones of note on the downside, with the 200-day moving average the next key level overhead, sitting around the psychologically important $4,500 per ounce level.

With RSI 14 continuing to trend higher above 50, upside momentum continues to build. That message is reinforced by MACD, which has staged a bullish crossover and flipped positive. Combined, it favours buying pullbacks and breakouts, rather than playing it from the short-side.

As such, pullbacks towards either the 100-day moving average or $4,367 offer potential long setups, allowing for a stop to be placed underneath either for protection against reversal. Initial targets include the 200-day simple average, followed by $4,580, $4,650 and $4,775, all of which acted as resistance earlier this year.

If gold was to reverse back beneath $4,367, it would give bulls some food for thought, raising the risk of a period of sideways range trade rather than an extension of the bullish breakout.

Silver Breakout Brings $71 Into View

Source: TradingView

While the move doesn’t look as spectacular on the silver chart, the breakout earlier this week saw the price break above the 50-day simple moving average, the downtrend running from the record high set earlier this year, and horizontal resistance at $63.29. The price has since gone on with the move, pushing higher towards resistance at $67. Those two levels are now the immediate focus for anyone trading silver.

The message from the oscillators is bullish. RSI 14 continues to trend higher and is not yet overbought, sitting around 64. That message is confirmed by MACD, which has staged a bullish crossover and flipped positive, indicating upside momentum is building. Combined, that favours buying dips and bullish breakouts.

Pullbacks towards $63.29 would provide a potential entry for those contemplating longs, allowing for stops to be placed beneath it, the downtrend running from the January high, or the 50-day simple moving average, depending on desired risk-reward. If the price does not pull back and instead breaks above $67 and holds there, that too creates a long setup, allowing for entry above with a stop beneath for protection. Upside targets would include the 100-day simple moving average, followed by $71, where the 200-day simple moving average coincides with resistance that capped the price in June.

A break above the 200-day simple moving average would be particularly interesting, especially as the move over the past few days comes from what resembles a long-running falling wedge. The structure is not perfect, with both sides tested on only a few separate occasions, but it nonetheless suggests there is a risk we could see a resumption of the broader bullish trend seen earlier this year.