Precious metals in focus ahead of Powell's Jackson Hole appearance
The long-term outlook highlights a propensity for gold to outperform. However, with treasury yields on the rise, could we be set for a period of relative silver strength?
Precious metal volatility expected for Jackson Hole meeting
Gold is a key market to watch for the days ahead, as speculation over what Jerome Powell could say in his Jackson Hole speech brings the potential for fresh tapering guidance.
The potential for a push towards tighter monetary policy does raise the risk of a selloff for gold, with the 2013 ‘taper tantrum’ seeing the metal head sharply lower after years of quantitative easing (QE)-fuelled gains. While we are looking for a likely start to tapering this year, it is yet to be determined whether the size and timing of that shift will be laid out on Friday.
With that in mind, keep an eye out for Powell’s speech as a basis for gold and silver sentiment over the near-term. With gold turning lower from the confluence of 100 and 200-simple moving average (SMA) resistance, we are clearly starting to see some doubts creep in after the optimism brought following a less than convincing set of Federal Open Committee Meeting (FOMC) minutes.
Yields point towards potential silver outperformance
The gold/silver ratio is a key market for traders to watch out for, with silver often outperforming at times of economic confidence. That relationship can be better highlighted by the chart below, with the US 10-year yield highly correlated with the silver/gold ratio.
This essentially tells us that when people are confident about the direction of travel for the economy, traders will typically gain the confidence to shift into the more volatile silver over gold.
However, while higher interest rates at the Federal Reserve (Fed) should be bad for precious metals, the long-term trajectory for both yields and interest rates remains bearish. That points towards further silver underperformance.
Could Powell bring a short-term spike for gold?
While the long-term downtrend for yields does highlight the potential for further gold outperformance over silver, we have seen the US 10-year yield rise over the past month, with the silver/gold ratio failing to follow suit.
That divergence does point towards a potential push higher for silver over the coming days, although Powell’s appearance will be key going forward.
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