This has been a tough period for metals prices in the commodities sector. As so often has been the case, there is a key link between the performance of the USD and that of metals prices. However, with risk appetite and the USD playing a role, this is also meaning that there is a safe haven pull which is helping to underpin the move higher on gold.
- USD remains a key driver of commodities
- Gold is finding a safe haven bid
- Silver is struggling as the USD has found support
USD performance is key for commodities
Let’s first take a look at the performance of some of the key metals prices. As so often is the case, the USD is a big determining factor in the performance.
It is almost as though you can break 2023 down into chunks of four or five weeks, where we have seen a fluctuating performance.
- January was weak for the USD, metals prices gained
- February to early March saw a USD rally, which weighed on metals prices (apart from iron ore amid the hope/expectation of a China re-opening boom)
- March to mid-April was dominated by the banking crisis that hit both the USD and risk appetite. Base metals broadly fell along with the USD.
- Since mid-April the USD has stabilised and this has continued to weigh on base metals primarily.
The question, for now, is one of what is driving the USD stability. It is due to worries that inflation is not coming down as fast as it could be. Additionally, worries that the move towards a US recession is driving a safe haven flow.
Now, that shift towards a more negative risk appetite and a safe haven flow seems to be the key factor in the moves on metals prices. Base metals are falling (China’s stuttering re-opening is also impacting here), whilst silver is suffering as a hybrid industrial metal. It is interesting also to see that this negative risk appetite is also helping to support gold.
Gold is holding up despite the USD rebound
The performance of gold has been very closely aligned with the USD throughout much of the past year. Initially, on the breakout of war in Ukraine, there was a safe haven flow across major markets which allowed gold to rally as the USD was also driving higher. However, as markets began to calm down after about a month into the conflict, gold lost its safe haven bid and reverted to being a play on the USD.
Since April 2022, to call trade direction on gold you merely needed to read the USD. USD was rallying, for much of 2022 and so dragging gold lower. This continued into 2023 as the USD fell away and gold rebounded.
However, there has been a noticeable move that is decoupling the correlation in the past three weeks. As the USD has found support and started to rally (even though Treasury yields have been relatively stable).
My first chart shows that other commodities have fallen hard as the USD has rebounded. However, gold has held up relatively well. This suggests there is a safe haven flow for gold now.
The chart of the correlation between gold and the USD shows chart shows the 21-day Correlation is at a six-month high. This suggests that there is a move towards gold and the USD moving in the same direction.
Now, if the USD continues to rally, it is likely that gold will struggle to make gains. However, gold is at least holding its value, for now. I will be watching the psychological $2000 level with interest, but on the Gold futures, the key price support comes in at $1970/$1977. If this is broken then we would have to start talking about top patterns and a correction in the technical analysis. For now, though, the support is holding.
Silver remains very much a USD negative correlation play
I like my correlation charts. I think they tell me a lot about where the tide of markets is flowing. The correlation between Silver and the USD is particularly strong. The average over the 21-day correlation over the past 12 months is currently -0.71. This means that if you can call the direction on the USD, there is a very strong chance you can call the direction on Silver.
The USD has rallied recently. That’s why we have seen silver falling so hard in the past week or so. The correlation remains strongly negative. If this near-term rally on the USD continues, then I expect silver to continue to fall.
This move has pulled the Silver futures sharply lower and has broken a key level of support at $24.56. This was the late April low and completes a reversal pattern that implies a retreat to $23.17. There is also a negative divergence with the relative strength index (RSI) that adds conviction to my view.
The moves have been volatile in recent sessions, but there certainly seems to have been a shift in outlook. The breakdown at $24.56 is now a basis of resistance for any near-term rebounds.
