Gold and Silver prices stay bullish despite pausing rally

Precious metals are consolidating this week after seeing enormous gains since the beginning of March. Gold price (XAU/USD) is trading in shrinking daily candlesticks as the week advances while staying above $1,950 after having peaked around the thick $2,000 round resistance in the last week. Meanwhile, Silver price (XAG/USD) has seen a constant uptrend with fewer ups-and-downs and is located above $23, still with room to cover before reaching the year-to-date highs of early January around $24.50.

Gold price waits for US PCE inflation, Chinese PMIs

Gold trading has been choppy for most of the week as the volatility seen in the past two weeks, with banking bankruptcies and high-stakes central bank meetings getting all the attention, has temporarily faded.

The market is now looking ahead to the next Federal Reserve (Fed) meeting in early May, and will spend April trying to figure out the likelihood of more interest rate hikes to combat relentless inflation before the hypothetical easing of the monetary policy by the US central bank starts. The next top-tier event to start figuring that out is the US Personal Consumption Expenditures (PCE) Price Index release on Friday, the Fed’s preferred measure of inflation. Friday should be a high-stakes trading day, featuring also the Chinese Purchasing Managers Index (PMI) releases – China is the biggest Gold market in the world – and end-of-quarter trading flows.

Giles Coghlan, Chief Market Analyst at HYCM and an FXStreet contributor, analyzes how the US PCE inflation data, particularly in its core indicator, can shape short-term interest rate expectations. With two interest rate cuts currently expected for 2023, Coghlan focuses on US Core PCE YoY measure, which the market expects to come in at 4.7%, and explains that any beat above 4.9% could be negative for Gold in the short term, but provide buy-the-dip chances for bright metal bulls:

If the print comes in above the maximum expectations of 4.9% then that will increase the pressure on the Federal Reserve and should weigh on the S&P500, boost the USD, and weigh on precious metals. However, with real yields falling any deep dips in gold could be good buying opportunities.

Gold price (XAU/USD) daily chart analysis by Giles Coghlan, Chief Market Analyst at FXStreet

Until then, Gold price is likely to stay rangebound, together with stable US Treasury bond yields and US Dollar Index value.

Gold long-term upside supported by "hard landing" narrative

Even if Gold price bulls are currently taking a break, the case for continuing gains, in the long run, remains very much in the market mind. The banking crisis might have been stopped for now, but credit conditions get tighter with rising interest rates and that does put pressure on the Federal Reserve. Even if inflation refuses to come down as fast as central bankers would like to see, it will be difficult for them to keep the monetary policy as tight as they would like if they want to keep financial stability.

Phil Carr, Head of Trading at the Gold & Silver Club, portrays this tough situation for the Fed as a great opportunity for precious metal bulls:

Banking crises are almost never resolved in weeks or months. The consequences can last for years, if not decades triggering a sequence of events, which can send the economy spiralling from crisis to crisis.

As a result, this month the market narrative has shifted from "no landing" to "hard landing". This in itself presents, a huge bullish tailwind for precious metal prices in 2023. 

Carr doesn't stop here and explains why the banking stress might trigger a "global credit crunch," something that could quickly spiral into a global crisis:

When banks face instability, as they are now they tend to become increasingly conservative. They’re more selective with loans and they often increase the interest rates on the loans they do offer.

These tighter lending condition can makes capital extremely difficult to come by for individuals and businesses – in other words: sparking a global “Credit Crunch”.

Federal Reserve Chairman Jerome Powell actually acknowledged this in his press conference after the FOMC meeting last week this possibility, and his comments exacerbated the US Dollar downside, supporting Gold and Silver prices among other safe-haven assets. Phil Carr insists this could be a great opportunity for Gold bulls to make some profits:

This scenario has traders convinced that the Fed will cut interest rates later this year. Interestingly, as the Fed inches closer to the end of their current rate-hike cycle, the ECB has only just started. ECB rate hikes will enviably strengthen the Euro and inversely weaken the U.S dollar, which in itself presents, yet another bullish tailwind for precious metal prices ahead.

Gold price: US Treasury bonds, the US Dollar and inflation dynamics

Gold is a non-yielding asset – holding it does not provide regular revenue – so it usually remains negatively correlated with United States Treasury bond yields. The benchmark US 10-year bond yield was constantly on the rise for most of 2022 as a response to the Federal Reserve raising interest rates to combat skyrocketing inflation. 

Price pressures remain high early in 2023, but Consumer Price Index (CPI) readings in the US and other big economies have shown signs of slowing down, and economists project this disinflation trend to continue through the rest of the year. A prolongation of this trend should help Gold price regain some footing from the demand side.

Treasury yields are not the only asset to track for Gold price (XAU/USD). The yellow metal is primarily traded in US Dollar terms, which makes it really vulnerable to currency market action. When the USD rallies against other major currencies and becomes the go-to asset, like it has been doing for the most part of the last year, Gold price tends to trend down as well. Of course, US Treasury yields and the US Dollar are highly correlated, so these dynamics are intertwined.

Silver price uptrend is solid and has room to the upside

The second most precious metal, Silver, has been developing in a high correlation with Gold, as usual. That said, XAG/USD has not seen as much of a retracement this week, actually making its higher daily close since early February on Wednesday, around $23.30. 

Silver had seen a much more profound sell-off during the market turnaround seen in February due to the expected Fed hawkishness. Since the course of financial markets swang again after the collapse of Silicon Valley Bank (SVB), Silver price had more room to recover but has done so with a relentless uptrend, barely noticing any retracements.

XAG/USD has already rallied past the 61.8% Fibonacci retracement level from the January 16-March 8 downtrend, and with its main Simple Moving Averages (20 and 100) in the daily chart nearing a bullish cross, it could soon find a platform for another rally back to year-to-date highs. These levels, around $24,50, are the main target and resistance for Silver bulls, as they coincide with a long-term bearish trendline that has contained price action since May 2021, a technical element that strongly reinforces the importance of this confluence. 

The fact that Silver price has managed to stay outside overbought territory helps the continuation of a slow but solid uptrend to these levels if fundamentals remain in favor of precious metals, with Federal Reserve interest rate expectations somewhat limited.

Silver price (XAG/USD) daily chart