Following a spectacular performance in 2020, the precious metals complex has fallen to its lowest price levels in three weeks and this has led many gold investors to ask key questions about whether or not the prior market rallies in gold and silver have finally ended. In this case, it can be argued that most of this weakness has been driven by generalized economic optimism that has been aided by continued efforts to distribute the COVID-19 vaccine.
However, given the various ways the economy can affect the value of gold, precious metals investors must be aware of recent market trends that have created upward pressures in the value of the U.S. dollar and sent government bond yields to their highest levels in over a year. Of course, higher valuations in the U.S. currency can make assets priced in dollars (like gold and silver) more expensive when purchased from foreign locations - and this can weigh on broader price trends throughout the global marketplace.
Additionally, rising yield in the 10-year Treasury note can weigh on gold and silver due to their inherent nature as non-yielding assets. Given that the yield on the 10-year U.S. Treasury note has risen above 1.7%, it might not be a complete surprise that we are now seeing a pullback in gold prices. But when we look at the long-term trajectories in the commodities sector, these pullbacks are starting to look much more like a buying opportunity than a reason to be concerned.
Specifically, I am currently watching for the ways market sentiment might be impacted as gold prices approach important support levels near $1,550 per ounce. In recent trading sessions, we have seen the price of gold fall through important psychological levels that are watched by many in the market (for example, near $1,700 and $1,800 per ounce). However, the downside break through these levels appears to be overblown, in my view, because there was not any real technical support in these areas (as defined by clear rounds of buying activity on the long-term charts).
For these reasons, strategies that are looking to capitalize on weakness in gold markets could be rewarded in cases where investors are willing to hold their positions until at least the second half of the year. Clearly, near-term momentum readings suggest that further declines might be possible. However, these readings do not appear to be much of a concern given the fact that the only support levels that have been tested by the market have been psychological in nature.
Longer-term, the chart readings are clearly working in favor of an underlying bullish momentum. Remember, we were trading below the $1,200 level just a short time ago (during the second-half of the 2018 trading period). This shows that the broader momentum assessments are clearly working in favor of the bullish side of the argument and this is why I am viewing the recent weakness in gold and silver markets as an opportunity to go long at lower levels. Ultimately, these declines have skewed risk-reward scenarios in favor of the bullish traders in the commodities space and further downside might be limited given the extent of the selling pressure we have seen over the last several weeks. Overall, key trading clues can be found when looking at the value of the U.S. dollar and in the trend trajectory that remains present for bond yields in U.S. Treasuries. As long as the yield on the 10-year Treasury note remains below 2%, I will be looking to trade gold and silver from the long side and to capitalize on the improved risk-reward scenarios that have been created by all of this recent activity in precious metals markets.
Richard Cox is a personal investor with more than two decades of experience in the financial markets. He is a syndicated writer, with works appearing on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine.
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