At the time of writing, gold was down about 0.5% on the day. But it was silver making the move with losses of around 4%. Silver’s sell-off could be a warning that gold may also take a plunge soon.
After their impressive recoveries in the past two and a half months, traders are wondering whether it still make sense to keep on buying gold and silver when the Fed is still raising interest rates. The market has become confident that the hiking cycle will soon stop as inflationary pressures continue to wane. But the noticeable recovery in oil prices this year means there is a risk that inflation could remain stickier than expected. What’s more, expectations of a sharp economic slowdown have not come to fruition yet, which further reduces the need for the Fed to apply the brakes on its hiking cycle too prematurely. That’s also true for other central banks like the European Central Bank. Today, Governing Council member Klaas Knot said that the ECB would raise interest rates by 50 basis points in February and March and will continue to raise rates after. A week earlier, ECB President Christine Lagarde had said a similar thing. Elsewhere, the Swiss National Bank’s chair Thomas Jordan has said that fighting inflation and ensuring price stability is "absolutely essential."
Gold has not formed a bearish reversal signal yet, although silver’s sharp drop today may be a warning for what’s to come.
Meanwhile bond yields have risen sharply, with the 10-year breaking above the bearish trend line.
Gold traders will also be watching the dollar closely after the Dollar Index recently tested the 50% retracement level of its entire upswing from 2021. A higher high on the DXY could ignite a sell-off in gold.
As far as gold itself is concerned, well bearish speculators may wish to wait for the metal to create a breakdown in its short-term bullish price structure first. A short-term lower low would be formed if gold break below $1896. Meanwhile, the RSI momentum indicator has formed a lower high near the ‘overbought’ threshold of 70, suggesting gold could be losing bullish momentum already.
So, the warning signs are all there for a possible correction in gold.