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Dollar’s Strong Growth Impacts Gold and Silver, Endangers Precious Metals’ Uptrends

by Onuraag Das   ·  July 29, 2023  

The global financial markets have been witnessing a remarkable surge in the US economy, which has propelled the dollar to new heights. This significant growth is impacting the prices of precious metals like gold and silver, as investors grapple with the potential consequences of a stronger dollar on their long-term uptrends. In this comprehensive analysis, we will delve deeper into recent developments in the gold and silver markets, examine key support and resistance levels, and explore the implications of the robust US growth on these precious metals.

Gold’s Ascending Channel Under Pressure, Silver Swings Lower Amid Dollar’s Strong Growth

Gold, often seen as a safe-haven asset and a store of value, has historically been favored by investors during times of economic uncertainty and market volatility. However, the recent surge in the value of the US dollar has posed a considerable threat to gold’s long-standing uptrend. The ascending channel, which had symbolized gold’s upward trajectory, was breached during the week ending on 23 June. Subsequently, gold prices struggled to regain momentum and remained below the critical channel support level for multiple weeks.

GOLD WEEKLY CHART
Source: dailyFX

A closer examination of the weekly candlestick charts reveals a worrisome pattern. Extended upper wicks on the candles indicate a rejection of the channel, raising concerns about a potential weekly decline if prices close below the significant level of 1956. The sustainability of the dollar’s recent directional move will play a crucial role in determining gold’s short-term performance.

The Daily Chart Reveals Near-Term Challenges

Zooming into the daily chart provides a more granular view of gold’s recent price action. A significant drop in prices was witnessed, followed by a modest rebound as the 50-day simple moving average (SMA) offered some support. However, the Moving Average Convergence Divergence (MACD) indicator hints at a possible bearish crossover if prices fail to breach the 1960 level, which could attract dollar bears and add further pressure on the precious metal.

The outlook for gold continues to be influenced by the Federal Reserve’s (Fed) future interest rate hikes and the overall stability of the US economy. If inflationary pressures subside across all fronts, market participants may revise their expectations of future rate hikes, potentially supporting gold prices. Moreover, any economic dislocations arising from restrictive financial conditions or banking sector vulnerabilities would enhance gold’s appeal as a safe-haven asset, attracting investors seeking shelter from market uncertainties.

US Economic Growth Creates Uncertainty for Gold

The rapid pace at which the US economy is advancing is raising concerns within the Federal Reserve. Recently, the second-quarter GDP beat estimates significantly, indicating robust economic growth. Additionally, historically low unemployment rates, coupled with an increasingly robust economy, create the potential for higher inflation. This situation could prompt the Federal Reserve to consider further rate hikes, leading to a firmer dollar and potentially causing weakness in gold.

GOLD DAILY CHART
Source: dailyFX

As investors closely monitor economic indicators and the Federal Reserve’s policy decisions, uncertainty looms over gold’s future. A delicate balance exists between the attractiveness of gold as a safe-haven asset and the allure of higher returns in a growing economy. The interplay of these factors will determine the precious metal’s trajectory in the coming weeks and months.

Silver’s Weakness Amid Dollar Dominance

Silver, often referred to as “poor man’s gold,” has also felt the impact of the dollar’s surge. The recent advance of the dollar has led to declining prices for silver, creating concern among investors. The daily candlestick patterns indicate that silver has printed two lower lows without achieving a higher high, signaling potential weakness ahead.

A critical level of interest to the upside is at 24.45, as it previously served as significant support during April and May. However, failure to trade and close above yesterday’s swing high maintains a bearish view for the commodity. Levels of support are anticipated at the 50% retracement (23.83) of the major 2021 move, followed by the 50-day SMA around 23.62.

Silver’s Dual Role: Industrial Metal and Precious Metal

Silver’s price dynamics are unique due to its dual role as both an industrial metal and a precious metal. While it shares some safe-haven characteristics with gold, its industrial uses in electronics, solar panels, and various other applications also influence its price movements. Therefore, silver’s performance often reflects the state of global manufacturing and technological advancements in addition to macroeconomic trends.

SILVER DAILY CHART
Source: dailyFX

The recent weakness in silver can be partly attributed to the dollar’s strength, which has made commodities denominated in the greenback relatively more expensive for foreign buyers. Moreover, concerns over a potential economic slowdown or disruptions in supply chains can further impact silver prices, making them more susceptible to short-term fluctuations compared to gold.

Potential Factors Influencing Precious Metals’ Future

Looking ahead, several factors are likely to influence the future performance of precious metals:

  1. US Dollar Movement: The strength or weakness of the US dollar will remain a critical driver for gold and silver prices. A continuation of the dollar’s rally may exert downward pressure on precious metals, while any signs of a weakening dollar could bolster their appeal.
  2. Federal Reserve Policy: The Federal Reserve’s interest rate decisions and monetary policy statements will be closely scrutinized by investors. Hints of future rate hikes may dampen gold’s allure, while a dovish stance could provide support.
  3. Inflation and Economic Indicators: The trajectory of inflation and economic indicators will be pivotal for precious metals. Rising inflation and economic uncertainties tend to boost the appeal of safe-haven assets like gold.
  4. Global Geopolitical Risks: Geopolitical events, such as trade tensions, political instability, and conflicts, can create volatility and spur demand for precious metals as safe havens.

Conclusion

As the global financial landscape continues to evolve, traders and investors must remain vigilant and informed about changing market dynamics. The interplay between the dollar’s strength, inflationary pressures, and the Federal Reserve’s policy decisions will be instrumental in shaping the future of gold and silver prices. Whether these precious metals can maintain their allure as safe-haven assets amidst a backdrop of economic growth remains to be seen. Additionally, silver’s dual role as an industrial and precious metal adds complexity to its price dynamics, making it vulnerable to a wide array of market factors. Amidst these uncertainties, investors should carefully assess their risk tolerance and consider diversifying their portfolios to navigate potential market fluctuations with confidence.

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