Gold/Silver Technical Outlook:
- XAU/USD is about to undergo a major long-term test
- Silver rally may continue if gold holds, but a macro-breakdown may be too much
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Spot gold (XAU/USD) has been weak, and as outlined last week it was expected that the bounce at the time would end sooner rather than later. This has a major area of support in play around the 1680 level that extends back to early 2021.
At the same time, spot silver (XAG/USD) has been quite strong coming from levels not seen in over two years. This has lead to a material breakdown in the almost always reliable positive correlation between gold and silver.
It’s not the first time this has happened nor will it be the last time, but the divergence is highly unlikely to be sustainable for a long period of time. The last time the one moth correlation was negative was in July 2021, and sporadically over time before that. Otherwise, it is often in the very strong 0.80-1 range.
It is currently at 0.35, it’s lowest level since last year. The divergence could continue for a little while longer, but the correlation could strengthen at any time without notice. What could change this? Getting back to XAU and the 1680 level, if this were to hold and put a floor in gold then we could see gold and silver move higher together.
If the floor is broken, a scenario that is seen as more probable given the strength of the dollar and weakness in everything else, then the weight of it all could end the rally for XAG and cause it to sell off again.
I think this makes things trickier for silver as it isn’t currently around any major levels, so in the spirit of keeping things simple when looking at precious metals the focus is on the price action in gold. A hold of the floor down to 1676, with perhaps even a very short-lived drop below and recovery back above, could turn the trading bias positive for gold, and perhaps even accelerate the upside for silver.
If a breakdown occurs, then old support will become viewed as a new source of resistance for XAU that can be looked to as a guide. In this scenario, watch for weakness to develop in XAG.
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Gold (XAU/USD) Price Daily Chart
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Silver (XAG/USD) Price Daily Chart
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—Written by Paul Robinson, Market Analyst
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