Gold Could Be Next as Silver Takes a Plunge

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At the time of writing, gold was down about 0.5% on the day. But it was silver making the move with losses of around 4%. Silver’s sell-off could be a warning that gold may also plunge soon.

After their impressive recoveries in the past two and a half months, traders are wondering if it still makes sense to keep buying gold and silver when the Fed is still raising interest rates. The market has become confident that the migration cycle will soon stop as inflationary pressures continue to ease. But the remarkable recovery in oil prices this year means there is a risk that inflation could remain stickier than expected. In addition, expectations of a sharp economic slowdown have not yet materialized, which further reduces the need for the Fed to apply the brakes to its hiking cycle too prematurely. This also applies to other central banks such as the European Central Bank. Today, Governing Council member Klaas Knot said the ECB will raise interest rates by 50 basis points in February and March and continue to raise rates thereafter. A week earlier, ECB president Christine Lagarde said a similar thing. Elsewhere, Swiss National Bank president Thomas Jordan said fighting inflation and ensuring price stability were “absolutely essential”.

Gold has yet to form a bearish reversal signal, although silver’s sharp drop today may be a warning of what’s to come.

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Meanwhile, bond yields rose sharply, with the 10-year breaking above the bearish trend line.

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Gold traders will also be watching the dollar closely after the Dollar Index recently tested the 50% retracement level of its 2021 all-time high. A higher high on the DXY could ignite a selloff in gold.

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As for gold itself, well-bearish speculators may want to wait first for the metal to create a break in its short-term bullish price structure. A short-term lower low would be formed if gold breaks below $1896. Meanwhile, the RSI momentum indicator formed a lower high near the “overbought” threshold of 70, suggesting that gold could already be losing bullish momentum.

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So, the warning signs are all there for a possible correction in gold.

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