Gold and silver prices: is a bearish reversal emerging?

Gold and silver prices have been on the slide over the past weeks, with the bullish resurgence seen throughout the past six months giving way to a potential bearish reversal. The role of gold as a safe-haven play has come into question in particular, with the breakdown in global trade doing little to boost the precious metal throughout the first three quarters of 2018. With the US dollar also perceived as a haven, the attractiveness of gold in a period of uncertainty will come through the markets view on whether the dollar is in demand or not. This is due to the fact that gold is valued in dollars. The perceived current and future benefits from the US-China trade war has been raised the attractiveness of the dollar throughout this period of uncertainty, with gold showing weakness as a result.

However, with the dollar becoming less attractive as a result of a sharp decline in US third quarter (Q3) gross domestic product (GDP) released in late October, alongside the Trump-led government shutdown through December and January, this shifted the focus away from the dollar, raising the attractiveness of alternate havens, such as gold and silver. We are now seeing signs of a potential bearish reversal, as the prospect of a US-China trade deal and market recovery dents the outlook for these precious metals.

Where next for gold prices?

Looking at the gold sell-off, it is evident that the upside seen throughout much of 2018 was an attempt to head back into the $1357-$1375 resistance zone. Previous peaks have not been entirely consistent in where they reverse and thus the fact that we have seen the price turn lower moderately earlier than expected should not necessarily rule out a bearish reversal coming into play.

The weekly chart highlights a number of key factors, with the selling seen throughout the past two weeks likely to provide the beginning rather than the sum-total of the downside. From a price action perspective, we are coming off the back of a bearish engulfing pattern, which in turn was preceded by a bearish inverted hammer candle.

On the indicators, we can see that the stochastic oscillator has broken back below the overbought threshold of 80. We are also likely to see the moving average convergence/divergence (MACD) histogram break back below the zero mark next week, should the current trajectory continue. If you look at the past three years, selling once we have seen both these events occur (stochastic falls below 80, MACD falls below zero) has typically provided substantial gains. We have seen the odd failed signal, yet that is often taking place further away from this resistance zone.

On the shorter timeframe, the four-hour chart highlights the importance of the break below $1303 as the first major sell signal as we move out of an uptrend. We are now approaching the next major swing low, with the $1277 level representing the January low. With global stocks at risk of a pullback, we could see some form of rebound if we do not break below $1277, yet unless we see a rally through the $1333 level, such a rally would look like a precursor to further losses.

Where next for silver prices?

Silver has also seen substantial downside over the past week, bringing about a heightened chance of another downturn from here on in. The monthly chart, below, highlights the wider silver sell-off, with the creation of lower highs in place since the July 2016 peak. With the recent rally into trendline resistance providing us with another lower high, we are now looking likely to resume that wider bearish market trend.

Once again, the stochastic has crossed through the oversold mark (80), with a sell signal coming on the break back below that level. Given that four of the previous five occasions have marked market tops, there is a strong chance that we are set for another strong move lower from here. This bearish signal has been confirmed by the break below the first major swing low at $15.18.

The four-hour chart highlights the recent period of consolidation that has been in place since we broke below the notable $15.18 support level. The ability to remain below that level is going to be key in providing further weakness for silver prices, with a rally through $15.18 likely to drive a short-term rebound.