Forex - Gold Silver Breakout Might Need to Catch a Breather


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Main Points:

• Gold price breaks out of recent range on Federal Reserve Chair Yellen’s Congressional testimony.

• Silver prices lag and face several months’ resistance nearby.

• Precious metals might see some consolidation if not profit taking.

Call it what you will, but the Federal Reserve has an unwavering grip on various asset classes across global markets. The behavior of several headline markets, namely Gold (CFD Ticker: XAUUSD), US Treasuries, and the S&P 500 (CFD Ticker: SPX500) suggests that traders see the Federal Reserve’s QE3 stimulus program carrying forward into the future for a greater than otherwise anticipated time. When bonds, stocks, and precious metals rally all at once, and usually at the US Dollar’s expense, it is a sign that the “QE” trade dynamic from 2009 to 2011 is active. Why is this the case? When the US Dollar falls, commodities denominated in dollars rise in value, i.e. precious metals. A falling US Dollar is sparked by falling US Treasury yields, which happens as traders buy bonds ahead of the Federal Reserve’s QE efforts. With cheap liquidity in hand, traders also flee to riskier assets like equity markets, i.e. stocks. The resiliency of the price of gold and silver prices (CFD Ticker: XAGUSD) the past three weeks builds on the two themes currently driving the Fed. First, the period of range trading in gold prices between $1230 and $1275 developed during a stretch when many analysts and pundits in the financial media were arguing that the weak US economic data was a result of inclement weather conditions. The confusion over the reasons why the US economy might have undergone a period of weaker data is certainly reflected in the XAU/USD and XAG/USD charts. For XAU/USD specifically, the last several days have offered a path higher as US economic data remains in a downtrend, and the new Federal Reserve Chair Yellen’s promise at her Congressional testimony on Tuesday, February 11th, to keep policy accommodative for the foreseeable future has helped reinvigorate traders’ appetite for the shiny metal.

Forex - Gold Price Daily Chart

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Both the “closing range” (above $1270) and “absolute range” (above $1275) that held the price of gold for the last three weeks were cleared by early in the day on Tuesday. The Slow Stochastic indicator “buy” signal that was issued on February 4th has offered traders a directional cue.

A well-known trading idiom made famous by Jesse Livermore, author of “Reminiscences of a Stock Operator,” may apply here: markets tend to follow the path of least resistance. If the rebound from the lows set early in the year is to continue, it may be necessary for the Slow Stochastic indicator to ‘digest’ again. The $1230 to $1270 range that contained gold resulted after the Slow Stochastic indicator exited its overbought condition, yet the price of gold did hold its range and now has broken the range to the upside following the February 4 “buy” signal.

The Doji daily candle on Wednesday suggests that the market may be ready to pause. The Slow Stochastic indicator has seen the %K and %D differential narrow. This means that the momentum setting higher highs is starting to wane. In the event that XAU/USD turns lower from some combination of profit taking and/or new sellers arriving, the important level to hold will be at $1267-70. The uptrend from the January lows is at $1267 at the end of this week, and $1270 is the former closing high of the year before this week (rounded from $1269.89).

Forex - Silver Prices Daily Chart

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Even though gold prices have broken out, silver prices have been the laggard. Gold has yet to overtake its 2014 closing high of $20.370. A bit of trouble may be ahead with divergence in the Slow Stochastic indicator. The indicator has set a new high for the year but price has not. Like in gold, silver's Slow Stochastic indicator is starting to weaken in overbought territory; the %K and %D differential is narrowing.

Because gold and silver have moved together so closely recently (rolling 20-day correlation of +0.80), a pause in the gold breakout most likely means that silver will stay in its three month long range. But precious metals bulls shouldn’t be discouraged just yet: if gold and silver are able to work off these overbought levels without sacrificing price, it would be an indication that buyers are coming in to support price with a breakout in mind. A gold price breakout would be watched for above $20.370 and $20.600 now that the downtrend from the August and October 2013 highs has been cleared.

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