Preparing for THE Bottom: Part 3 - Gold to Silver Ratio
Gold Forecast and News
Gold falls towards $2,330 as the mood sours
US inflation-related data took its toll on financial markets. Wall Street turned south after the opening and without signs of easing price pressures in the world’s largest economy. The US Dollar takes the lead in a risk-averse environment.
Latest XAU/USD News
XAU/USD Technical Overview
Gold price has broken out of a slanted rectangular formation (red-shaded area), probably a Bear Flag continuation price pattern which formed between May 24 and 27.
The breakout activates the Bear Flag’s downside target zone of between $2,303 and $2,295. A break below Thursday’s $2,322 lows would provide further bearish confirmation.
Bear Flags look like upside-down flags composed of a sharp decline – the flagpole – and the consolidation phase or “flag square”.
A more bearish move could even see Gold fall to $2,272-$2,277 (the 100% extrapolation of the move prior to the trend-line break and historic support and resistance).
Gold's 4-hour chart, used to assess the short-term trend, now exhibits a sequence of declining peaks and troughs, suggesting it is in a short-term downtrend and favoring short positions over longs.
The precious metal’s medium and long-term trends are still bullish, however, suggesting the risk of a recovery remains high. That said, price action is not supporting a resumption hypothesis at the moment.
A decisive break back above the trendline, now at around $2,385, would be required to provide evidence of a recovery and reversal of the short-term downtrend.
A decisive break would be one accompanied by a long green bullish candle or three green candles in a row.
Fundamental Overview
Gold (XAU/USD) trades flat in the $2,340s on Friday, pausing in its labored recovery from Thursday’s three-week trough about $20 lower.
The recovery came after the release of weaker US growth data, which suggested inflation will remain contained and interest rates are more likely to come down. As a non-yielding asset, the expectation of lower interest rates is a positive for Gold.
Gold recovers after US growth slows
Gold rebounded on Thursday after the second estimate of US first-quarter GDP growth showed a downward revision to an annualized 1.3% from 1.6% in the first estimate.
The slower growth came from lower consumer spending, which in turn is expected to keep inflation contained, and the Federal Reserve (Fed) on track to lower interest rates. In a reflection of changing expectations after the GDP release, the US 10-year Treasury Note yield dropped back to 4.55% from a four-week peak of 4.63%.
Markets have been entertaining the possibility the Fed might even increase interest rates. However, commentary from several Fed officials on Thursday threw this idea out of the bag:
- Bank of Atlanta Fed President Raphael Bostic noted that he did not believe further rate hikes should be required to reach the Fed's 2.0% annual inflation target.
- Bank of Chicago Fed President Austan Goolsbee noted that while housing inflation was still "well elevated" making it hard to get to 2.0%, he was “Still optimistic that housing inflation will slow.”
- Bank of New York Fed President John Williams said that he believed Fed policy was well positioned to slowly get price growth back to the Fed's 2.0% annual target.
US Personal Consumption Expenditure (PCE) data for April, out on Friday, could impact interest-rate expectations further, in turn influencing Gold price. PCE is the Federal Reserve’s preferred gauge of inflation so it tends to carry more heft. Although, as several analysts have noted, the release is quite predictable, coming as it does after the CPI and PPI releases for the same month. That said, small deviations from expectations could still generate volatility.
The probabilities of the Fed cutting interest rates before September are insignificant and are hanging in the balance at 50/50 in September, data from the CME FedWatch Tool shows.
Gold and Asian demand as a currency hedge
US interest-rate expectations are not the only factor influencing the Gold price, according to Daniel Ghali, a Senior Commodity Strategist at TD Securities.
Ghali’s research shows that Gold demand is being driven by Asian buyers who are hoarding the precious metal as a hedge as their currencies depreciate against a strengthening US Dollar (USD).
“Precious metals are acting as a currency depreciation hedge. Case in point: fund flows into Chinese gold ETFs are rising once more at their fastest pace since the massive buying activity observed in April. US yields are surging, the dollar broke out of its lull, and yet precious metals prices have remained extremely resilient,” says Ghali.
This suggests the strength of the US Dollar may not be as negatively correlated to Gold as it was in the past, and Gold prices could be capped in the event of an appreciation of USD.
SPECIAL WEEKLY FORECAST
Interested in weekly XAU/USD forecasts? Our experts make weekly updates forecasting the next possible moves of the gold-dollar pair. Here you can find the most recent forecast by our market experts:
Gold: Technical outlook turns neutral heading into NFP week Premium
Following the previous week’s steep decline, Gold (XAU/USD) struggled to rebound this week, pressured by the broad-based US Dollar (USD) strength and rising US Treasury bond yields. High-tier macroeconomic data releases from the US next week could significantly influence the market pricing of the Federal Reserve’s (Fed) interest rate outlook and trigger the next big action in XAU/USD.
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EUR/USD clings to gains above 1.0850 after US inflation data
EUR/USD trades in positive territory above 1.0850 in the American session on Friday. The US Dollar struggles to preserve its strength following the April PCE inflation data and helps the pair hold its ground heading into the weekend.
GBP/USD retreats from 1.2765, holds on to modest gains
GBP/USD posted a two-day high peat at 1.2765 in the American session, as US data showed that the core PCE inflation held steady at 2.8% on a yearly basis in April. The pair retreated afterwards as risk aversion triggered US Dollar demand.
USD/JPY is likely to remain underpinned by lack of options in Japan
USD/JPY is likely to remain underpinned as the Bank of Japan has few options for sustainably strengthening the Yen. Direct intervention is only a quick fix and needs support from higher interest rates to work sustainably. The pair is likely to be a Dollar-affair with any declines resulting more from USD weakness rather than JPY strength.
Gold falls towards $2,330 as the mood sours
US inflation-related data took its toll on financial markets. Wall Street turned south after the opening and without signs of easing price pressures in the world’s largest economy. The US Dollar takes the lead in a risk-averse environment.
Oil enters wild ride and falls back in red after PCE numbers
Oil gives up earlier attempts to avoid losses and falls to session's low. OPEC+ will convene online to decide on production cuts, with most analysts expecting current cuts to extend into 2025. The US Dollar Index trades further below 105.00 to the mid 104.50-levels.
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XAU/USD YEARLY FORECAST
How could XAU/USD move this year? Our experts make a XAU/USD update forecasting the possible moves of the gold-dollar pair during the whole year. Don't miss our 2024 XAU/USD forecast!
2024 FORECAST FOR XAU/USD
In the XAU/USD Price Forecast 2024, our analyst, Eren Sengezer, notes that Gold carries its bullish potential into early 2024 on prospects of a looser Fed policy, lower US bond yields and a weaker USD. A downturn in the global economy, however, could weigh on demand and limit the precious metal’s gains. A lack of progress in the Fed’s efforts to lower inflation, on the other hand, could cause XAU/USD to turn south. Read more details about the forecast.
MOST INFLUENTIAL POLITICAL EVENTS IN 2024 FOR XAU/USD
The Russia-Ukraine conflict in 2022 and the Israel-Hamas dispute in 2023 underscored Gold's appeal as a safe-haven asset in uncertain times. Further escalation in the Middle East or a resurgence of the Russia-Ukraine conflict may push Gold prices higher.
A potential re-election of former President Donald Trump could involve a 10% tariff on foreign goods and a four-year plan to reduce essential Chinese imports. This could complicate the Federal Reserve's task of lowering inflation to the 2% target and strain relations with China, negatively affecting Gold's demand outlook.
Gold/Silver Ratio
This ratio normally goes well during risk aversion, while it falls off during times of risk-on. If this ratio is about to turn, or at key levels where it could turn, the
trader looks to the Equity indices if the risk has indeed been on and if it is about to turn as well.
When the ratio is rising, it means gold is outperforming silver, and when the line is falling, the first term is doing worse, i.e., silver is doing better. In other words, when the ratio is high, the general consensus is that silver is favored. Conversely, a low ratio tends to favor gold and may be a signal it’s a good time to buy the yellow metal. Despite the gold-to-silver ratio fluctuating so wildly, another way of using it is to switch holdings between silver and gold when the ratio swings to historically determined "extremes."
Read more about gold versus silver:
About Gold
XAU/USD, GOLD
In the Forex market, gold is a form of currency. The particularity of gold is that it can only be traded against United States dollars (USD). The internationally accepted code for gold is XAU. It is known to be a “safe-haven” asset, it is expected to increase its value in times of volatility and economic uncertainty.
The XAU/USD pair tells the trader how many US Dollar (the quote currency) are needed to purchase one Gold Ounce (the base currency). United States is the country that holds the biggest resources of gold in the world.
ORGANIZATIONS THAT INFLUENCE XAU/USD THE MOST
- WGC (World Gold Council), the market development organisation for the gold industry whose aim is to stimulate and sustain demand for that commodity.
- LBMA, London Bullion Market Association, whose members conduct trading in this wholesale over-the-counter market for the trading of gold and silver. It is loosely overseen by the Bank of England. Most of the members are major international banks or bullion dealers and refiners.
- COMEX (Commodity Exchange Inc.), the primary market for trading metals. The COMEX merged with the New York Mercantile exchange (NYMEX) in 1994 and became the division responsible for metals trading.
- Zurich Gold Pool founded in 1968 by the largest banks in Switzerland after the collapse of the London Gold Pool.
- CGSE, the Chinese Gold & Silver Exchange Society (see above the importance of China in terms of gold reserve).
PEOPLE THAT INFLUENCE XAU/USD THE MOST
- David Harquail, the World Gold Council’s Chairman
- Steven Mnuchin, US Treasury Secretary
- Xi Jinping, President of the People's Republic of China and General Secretary of the Communist Party of China
ECONOMIC DATA THAT INFLUENCE XAU/USD THE MOST
The main indicators that traders should watch to understand where gold is standing are:
- Demand vs Supply for the commodity
- Struggling markets or context of currency devaluation: gold is known to be a haven for investors in times of economic uncertainty or when any country sees its currency devaluing
- Practical applications: technology invents, jewellery use, etc
ASSETS THAT INFLUENCE XAU/USD THE MOST
- Currencies: USD and EUR. Other important group of influent pairs includes: EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, NZD/USD and USD/CAD.
- Commodities: Silver, the other most important precious metal commodity together with Gold.
- Bonds: Bund (the German word for "bond", a debt security issued by Germany's federal government) and T-Note (Treasury Note, a marketable U.S. government debt security)
- Indices: Hui (AMEX Gold BUGS), XAU (Philadelphia Gold and Silver Sector Index) and GDM (NYSE Arca Gold Miners Index) The most important stock exchanges are the New York Mercantile Exchange (COMEX), the Chicago Board of Trade, the Euronext/LIFFE, the London Bullion Market, the Tokyo Commodity Exchange, the Bolsa der Mercadorias e Futuros and the Korea Futures Exchange.
