Monthly Precious Metals Technical Analysis - March 2021

Gold made another significant decline in February as US yields rose sharply, with 10-year yields rising about 54 bp from open to high through the month. After initial support from the top of the Weekly cloud, the price descended to test the Cloud base by the middle of the month. A brief rebound faded, and the second test of the cloud base failed to hold, with gold making a low so far of US$1707 this week. The major support lies in the US$1670-1690 band, with support coming from the 61.80 % Fibonacci retracement and the June 2020 low.
 
At these levels, it is likely that most gold-valuation models are showing gold as undervalued.
 
The principal driver - bond yields - were driven higher for several reasons. Markets appraised higher levels of issuance in 2021 and with poor auction results last week, notably in the 7-year US issue. Primary Dealers left with excess holdings post-auction offloaded in a market with a sudden reduction in appetite – bearing in mind March issuance is expected to reach US$414 billion alone, twice as high as the previous record.
 
As inflation expectations moved to the highest levels in over a decade, with five-year break-evens sailing past 2.40 %, the shorter end of the curve started to tighten. This hurt participants positioned for curve steepening and possibly added to the selling of bonds in the shorter end of the curve. The result was a notable and rapid tightening. Considering the tremendous fiscal boost to the US economy, yields are likely to rise through the year.
 

US ISM Prices paid suggests CPI will take off?
 
Can gold benefit from this evolving environment?
 
An outcome of rapidly weakening correlations between bond yields and the S & P 500, a change that may be driven by evolving inflation expectations (https://www.cfm.fr/assets/Uploads/Bond-Equity-Correlations.pdf)  may result in both bond and equity markets underperforming together, an outcome which would favour gold as a risk-diversification play and inflation hedge.
 
Additionally, if inflation does ramp up, bonds will face further pressure, heightening gold (and silver) appeal as hard assets.
    CME Gold Managed Money futures up to February 23rd. Gold longs declined again, with a 1.77 million Tozs outflow between January the 26^th and February the 23^rd. Shorts have increased by around 1 million Tozs over the same time frame, a 20 % increase overall.
 
 
 
Breaking down through the Weekly cloud takes gold out of the medium-term uptrend. The price has retested the weekly cloud (now resistance). Support at the 61.80 % retracement (US$1691) and the June 2020 low (US$1670). Resistance at US$1761, US$1789 (Weekly Turning Line) and US$1834 (Weekly Standard Line) and US$1908 (Cloud top in mid-March).
 

   
Medium-term Chart: many of the downside targets shown in the Feb report have been reached. The targets to US$1694 and US$1676 look high in confidence.

 
Above the recent low, look for a recovery – perhaps one that extends right to the Weekly Ichimoku cloud top resistance?
    
The ratio suggests consolidation around 63-65, ranging to 70. The deeper targets to 60 remain in place. Short term, it is hard for silver to move beyond 60. However, given a relatively bullish outlook for silver, that target of 55 is worth looking at.
 
   
The macro view of silver. The price is compressed between the Weekly Standard and Weekly Turning lines, and a test of Weekly cloud top support at US$23.91 could be playing out. A break above US$30 opens the way to US$40.
 
 
   
Targets for the XAGUUSD medium term. The trend flips to bearish with moderate downside targets to US$23.22 and US$21.64. Above US$22, the target of US$30.55 remains in place.
 
  A slight net reduction, but longs remain positive with short increasing but still muted.
 

   
Despite the moves in the fixed income environment, the S & P remains supported at 3,806 by the Weekly Turning Line. Also, significant option strikes around the 3,900 level may help keep the price stuck near that level in the short term, barring another significant shock.
 

   
Reflecting confidence of a rebound, irrespective of earnings metrics et cetera... Sub 3,700 important.


  The DXY rallied up to 90.951, keeping gold on the defensive through the latter part of January. The process of consolidation appears to be creating fresh upside targets.
A break of the recent high targets 91.75-92.40. Shorts remain very short though, confident of their view.

   
The push higher in the AUD received a knock from Chinese PMI data. Support at 0.75 from the Weekly Standard Line. The key resistance is 0.8136, the January 2018 high.
Research from ANZ suggests AUD strength helped in March from strong FX inflows from the conversion of substantial USD dividends from commodity producers.
 
   
The AUD rolling over in the short term – again. Limited scope on the downside – 0.725 looks a long way away unless there is some horrible data out of China.