Gold, silver slammed as hawkish Fed repricing reignites dollar upside

• Fed funds futures imply another 3.5 hikes by mid-2027
• Five-year Treasury yields briefly push above 5%
• Gold-DXY five-day correlation has plunged to -0.91
• Silver’s five-day correlation with US 2-year yields is -0.88
• DXY breaks to fresh multi-month highs

Hawkish repricing turns up the pressure

Last week, I noted that gold and silver were holding up comparatively well despite the surge in US Treasury yields, with the dollar’s inability to capitalise on the move providing something of a stay of execution.

Well, that stay may have expired on Wednesday.

A very punchy September flash PMI report showed US business activity accelerating to its fastest pace in more than five years, with employment growth surging and price pressures intensifying. That helped hawk up the rates outlook, with Fed funds futures now implying another three-and-a-half 25 basis point hikes from the Fed out to the middle of next year.

That drove another sharp lift in yields across the Treasury curve, with the five-year sector hit particularly hard on a combination of improved nominal growth prospects and a soft five-year Treasury note auction during the session, which tailed and recorded a lower bid-to-cover ratio than the average seen in recent auctions.

Source: LSEG

No matter whether you’re talking the front or back end of the US Treasury curve, yields are either knocking on the door or have already pushed through levels rarely seen in modern times.

Oil strength keeps pressure on the long end

While the moves at the front end and belly of the curve are easily explained by the PMI report and Fed repricing, those at the back end likely also reflect the influence of higher energy prices, which ripped higher during the session.

Iranian President Masoud Pezeshkian told the UN General Assembly that Iran would not surrender in its war with the United States. That dashed hopes seen earlier in the week that some sort of deal to open the Strait of Hormuz would be forthcoming, sending Brent crude, the global benchmark, soaring back above $103 a barrel.

As we’ve discussed in previous analysis, rather than the front end of the US curve, it’s the back end that has been more responsive to shifts in crude prices, likely helping explain why 10- and 30-year Treasury yields resumed their climb above 5% during the session.

DXY and front-end yields take control

Source: TradingView

While the US dollar rebound had paused over recent weeks, capped beneath resistance at 100.5, that changed on Wednesday with a definitive breakout coinciding with the uplift in yields. That saw DXY resume its upward trend, hitting levels not seen since late July.

The move in the US dollar, and to a lesser extent the upward shift in front-end US yields, pressured precious metals on Wednesday, with the correlation matrix below demonstrating the extremely tight relationship both gold and silver have shared with DXY and front-end yields over the past week.

Source: LSEG

Over the past five sessions, gold’s correlation with DXY has fallen to -0.91 and silver’s to -0.93. The inverse relationship with nominal yields has also been extremely strong, particularly at the front end. Gold’s correlation with the US 2-year sits at -0.75 and with the 5-year at -0.70, while for silver the equivalent readings are -0.88 and -0.83.

What stands out is how much weaker the relationship has been with real yields. Gold’s five-session correlation with the US 5-year real yield is just -0.21 and -0.24 with the 10-year, while silver sits at -0.38 and -0.39 respectively.

The dollar itself has also been trading increasingly closely with front-end nominal yields. Over the same five-session window, DXY’s correlation with the US 2-year has been +0.75 and +0.74 with the 5-year, weakening progressively as you move further out the curve.

As such, it’s obvious now that hawkish repricing at the front end of the US curve is providing fuel to the dollar rally, creating a toxic mix for precious metals priced in US dollars that carry no yield.

While the message is simple as to what kind of environment gold and silver like and don’t like, the difficulty for traders right now is the skittish nature of how quickly that environment can change from one day to the next. Geopolitical headlines were one such factor on Wednesday, while the reaction to the flash PMI report was unusually large relative to what we’d normally expect from that release.

Gold bulls bend but don’t break

While directionally gold’s latest leg lower can be explained by the movement in yields and the dollar, in terms of magnitude it’s still notable that the price continues to hold around levels broadly seen throughout much of September, even as the dollar breaks to multi-month highs and yields hit historically high levels by modern standards.

So while the current environment is clearly weighing on gold, it’s not leading to a capitulation from bulls just yet, which is probably notable in itself.

Source: TradingView

Looking at the technical picture on the four-hourly chart, gold now finds itself sitting just beneath $4,292, the low set on September 22, which has flipped to providing resistance and is the immediate focal point overhead.

Underneath where the price now trades, there’s a confluence of several support levels. These include the trendline running from the September 2 low, which forms the lower side of what resembles a falling wedge structure, along with $4,235, the low set on September 17, and then $4,220 beneath that, a level that has previously acted as support and resistance for lengthy periods over the course of this year. That is the key focal point underneath where the price now trades.

The message from the oscillators suggests bears have the ascendancy, although the increase in downside pressure has stalled over the past half a day. RSI (14) sits at 39 and is yet to set a fresh lower low, while MACD has staged a bearish crossover of the signal line and sits in negative territory, albeit only marginally so.

As such, even with the difficult macro environment, more emphasis should be put on price action than retaining a specific bias if trading in the near term.

Above $4,292, downtrend resistance running from the September 4 high forms the upper end of the falling wedge structure, found today around $4,360. It’s also notable that gold struggled around $4,375 earlier in the week, with $4,400 another level of note above, marking where the price stalled on September 18.

If the support zone underneath where gold now trades is broken, it points to a potential retest of $4,165, the high set back in late July, and then $4,115 beneath that, a level that repeatedly acted as support and resistance during July.

Silver slips back into the lower range

Source: TradingView

Relative to gold, silver has been more rangy so far in September, trading in two distinct sideways ranges, characterised by resistance above $67.50 and support at $62.57, with $65 acting as the range divider in between.

After failing to crack $67.50 resistance earlier this week, the price reversed sharply lower to trade beneath $65, making that the first level of resistance overhead to watch. Underneath where the price now trades, $64 is another level to watch, with silver often gravitating towards big figures for periods over the past month or so, before $62.57 support would come into view.

If the price were to reverse back above $65, it would open the option for longs targeting a retest of the former range high at $67.50.

The message from the oscillators is one of gradually increasing downside pressure, with RSI (14) trading beneath 50 while MACD has just turned negative, having already crossed the signal line from above. It’s not a strongly bearish message, but it does marginally favour short setups over longs in the near term.