Gold, Silver Testing Support; What’s Next? [Fx Newsletter]

This trade idea was first sent to subscribers of the Free Profitable Forex Newsletter on June 17 2022.

It’s been a wild ride in the markets this week. As recently as Monday, everyone expected a 50 bp rate hike from the Fed, but then an article from the Wall Street Journal – suggesting that the Fed is considering to shock investors with a 75 bp hike – quickly shifted market expectations and sent the US dollar to a fresh cycle high while risky assets sold off. 

The main reason behind the Fed’s surprise shift to an even more hawkish rate hike was last Friday’s higher than forecasted CPI inflation report. The Fed is now clearly getting worried about inflation becoming entrenched and has decided to hike even more aggressively, potentially hurting the economy and stock markets with it.

Still, the hawkish move was again well-telegraphed (even if only a few days before), and by the time the rate increase was delivered Wednesday night, the markets had already adjusted. In the end, all we got was a “buy the rumor sell the fact” reaction, with risky assets bouncing on the Fed meeting, while US Treasury yields fell and took the dollar lower with them.

Gold and silver holding at key support

Of all markets, precious metals are perhaps the most interesting again, given the sticky inflationary environment. Considered the ultimate inflation protection assets (though nowadays some investors may also place Bitcoin in this category), gold and silver have both been hard-pressed against their solid long-term support zones by the Fed’s hawkish actions. 

The key question for traders and investors now is, will the support here hold or break?

Despite numerous attempts at it, both gold and silver are still holding above this key support. This could prove an important sign, especially if the support continues to hold and results in a new rally.

However, assessing whether the support breaks or the metals rebound from it again is very tricky in the current environment. It’s a highly uncertain outcome, given the inflation and the Fed’s (apparent) resolve to deal with it.

How things unfold in the following weeks will depend a lot on further communication from the Fed and new incoming economic data (especially inflation). If the Fed is really serious about fighting inflation, then they wouldn’t be afraid to hike rates even more aggressively than this and tighten even faster with QT. Such an outcome will be bearish for risky assets (stocks) and also for commodities and precious metals.

The initial market reaction to the Wednesday meeting (dollar down, stocks up, gold up) suggests that investors don’t think the Fed will fight inflation at all costs. If the Fed indeed caves in to fears of crashing the economy with the aggressive rate hikes and then switches to a more neutral or dovish stance despite the high inflation, the support in gold and silver will likely continue to hold.

However, this doesn’t have to prove correct, and in the coming weeks and months, we will find out which scenario plays out. 

In fact, the Fed could be willing and determined to fight inflation until the end, even if it means a nasty recession and a much deeper decline in stock markets. If the Fed presses with more hawkish moves (perhaps an even larger, 100bp hikes), then it could as well crash stock markets further, while gold and silver will probably break below this key support. 

This is why technical analysis can be so valuable for a trader. We are at a major crossroad in the fundamentals for gold/silver, and the technicals and price action are nicely highlighting this indecisiveness in the market.

We can summarize the two scenarios for gold and silver as follows:

The bearish case: 

• The support trendline doesn’t hold, in which case, a further extension to the downside will be very likely. The 1500 area for gold and 17-18 for silver look like the next destination for each.

The bullish case:

• Expect gold and silver to stay above the support line, but the current consolidation ranges (long-term weekly chart) will likely hold. That means the overall bias may remain slightly bearish as a major bullish move or upside breakout looks highly unlikely while the Fed and most other central banks are embarking on aggressive rate hike cycles.

With the major support trend lines being tested but still holding, the gold and silver market is actually testing the Fed, asking, can you do more to kill inflation?

-  If the answer is yes, then gold and silver will likely break lower this year.

-  If the Fed gets scared (answer is no), then gold and silver will stay above their respective support trendlines.

Trade signals from the past weeks

• May 16, Long EURGBP from 0.8490, exited at 0.8570 (Mon 06.13) ahead of the BOE meeting = +80 pips profit (trade idea sent May 11, 2022)
• June 03, Short GBPUSD from 1.2540, all targets reached, closed at 1.23 = +240 pips profit (trade idea sent June 02)
• June 10, Short EURUSD from 1.0625, target reached at 1.05 = +125 pips profit (trade idea sent May 27)  

TOTAL P/L in the past week: +445 pips

TOTAL: +5855 pips profit since October 1, 2018