Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips

Economic

Commodity

Summary:

Metals markets finally succumbed to the higher rates, stronger US dollar environment, with vulnerabilities evident earlier in the week finally materialising. But the underlying factors behind the rally have not gone away, making us inclined to continue buying dips.

An unfriendly environment for commodity markets right now

The US dollar strength we anticipated this week has materialised, creating headwinds for commodities which has had been rallying on renewed hopes for rate cuts from the Fed this year. The pullback in copper we warned of last week has played out, even if we got the timing marginally wrong. Silver and gold, the former sitting at extremely overbought territory earlier in the week, have also come under pressure.

Following Wednesday's rout, this note will look at the near-term outlook for the US dollar and interest rates, allowing traders to use the framework and apply it to the technical setup for gold, silver and copper on the four hourly charts.

Fed rate cut pricing is evaporating, not growing

For all the headlines earlier this week about commodity prices surging on renewed Fed rate cut hopes, pricing was moving in the complete opposite direction with the Fed funds 2024 curve stripping out 10 basis points of expected cuts from the levels seen last Thursday. That saw Treasury yields out the US curve back-up, seeing two-year note futures fall through a key level that has acted almost like a dividing line between ‘higher for longer' and ‘rate cut hopes' sentiment for months.

Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips_1

We discussed the importance of this level during a TV interview on Wednesday, cautioning the higher rates environment should assist US dollar strength and curtail risk appetite among investors, including in the metals markets which were already looking vulnerable.

With the assistance of hawkish central bank commentary from the Reserve Bank of New Zealand and in the minutes of the Fed's FOMC May meeting, along with a UK inflation report that was way too hot to see the Bank of England cut interest rates nest month, it came as no surprise to see the violent pullback in gold, silver and copper given how fast and hard they had run.

Start of something more sinister?

The question now is whether the bullish trend is over or has it simply paused for now? With very little top tier data to look at this week, it's meant Fed members have had to toe the line on the higher for longer rates narrative, likely explaining the rebound in US Treasury yields and the US dollar. However, the US economic wobbles that dominated discussion last week have not disappeared with downside misses in Citi's closely watched economic surprise index now within a whisker of being the most negative in nearly two years.

Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips_2

Should that trend continue, it points to only a limited lifespan for this latest bout of higher US yields and stronger US dollar, and an environment conducive to commodity price strength unless it coincides with a deterioration in the global economy.

So, to answer the question posed above, the answer is likely a pause in the metals rally, not start of a longer-term rout. And that means we're in the market to buy dips. Eventually.

Gold offers decent trade setup

Turning to gold, having tumbled through support at $2408, the price bounced from the intersection of uptrend and horizontal support at $2375 in the North American session, providing a useful setup for those eager to reset longs at improved levels. Those considering taking on the long trade could buy at these levels with a stop below $2375 for protection, targeting a bounce back to $2408.

While tempting, with price momentum to the downside, I'm in no rush to move in quickly, preferring to wait to see whether the price can hold these levels for more than a fleeting moment. Because if can't, a break below $2375 also generates a decent short setup, allowing for shorts to be initiated below the level with a stop above for protection. Aside from potential bids around $2355, there's not a lot of visible support evident until $2332.

Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips_3

Silver slump already encouraging dip-buyers

Silver is another interesting setup on the four hourly chart, breaking minor support at $30.95 on Wednesday but not really going on with it. The downside wicks provide clues that there's still willing buyers around, making a potential reversal back through the level a decent prospect on Thursday. If the price obliges, buy with a stop below the low of $30.72 for protection. On the topside, there's not a lot standing in the way towards a move above $32.

However, we must acknowledge the price momentum remains to the downside. If silver can't bounce back through $30.95, traders could consider selling with a stop above the level for protection. Uptrend support around $30.25 would be the first port of call with a break of that opening the potential for a deeper flush towards $29.79.

Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips_4

Copper bears finally get their way, for now

To copper, and it too has seen a decent pullback, with large sellers camped above $5 eventually getting their way. While the price action has been undeniably bearish recently, such is sentiment towards the red metal, it's difficult to see pullbacks much larger than what was seen on Wednesday.

While price momentum remains to the downside, those keen to buy dips now could initiate longs around these levels with a stop order below $4.746 for protection. Preferably, a push back above $4.813 makes for a better trade setup, allowing for a tight stop to be placed below the low of $4.78 targeting a push back towards $5.02.

Gold, Silver, Copper Hit by Higher Rates, Stretched Positioning, Bias Remains to Buy Dips_5

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