Markets are in turmoil to start the trading week on fears of another COVID-19 lockdown in the UK and concerns about the prospects of more stimulus from the US with the focus shifting to the Supreme Court.
While gold typically rallies when political/social/economic uncertainty rises, the falling probability of additional fiscal stimulus from Congress is weighing on the yellow metal. After all, surging government deficits, combined with unprecedented monetary policy stimulus, have been one of the biggest tailwinds for precious metals so far this year. With Congress now shifting its focus toward what promises to be a bitter nomination battle for a new Supreme Court justice just 43 days before an historic election, direct stimulus checks and (re)expanding unemployment benefits will likely get pushed onto the backburner. The fact that the US dollar was yesterday's strongest major currency certainly isn’t helping gold investors either.
Turning our attention to the charts reveals that yesterday’s price action may mark a key medium-term turning point for the precious metals. After spending the last six weeks consolidating in an ever-tightening “symmetrical triangle” pattern, gold is breaking down. The metal is also on track for only its second close below its 50-day exponential moving average since March, suggesting that the established uptrend is under threat.
A close here, confirmed by continued weakness today, would be a sign that the yellow metal may be set for a deeper pullback toward $1836 (the 38.2% Fibonacci retracement of the March-August rally) or $1763 (the 50% retracement) next. Bulls would want to see gold regain its 50-day EMA and ideally close above near-term descending trend line resistance near $1950 before rejoining the uptrend with confidence.
Meanwhile, the technical outlook on silver is similarly downbeat. The grey metal also broke down from a consolidation pattern yesterday to trade back below its 50-day EMA. The next bearish targets for silver come in at $22.90 (the 38.2% Fibonacci retracement and previous support/resistance from late July) and $20.75 (the 50% retracement).
We’ve all seen trends change on a dime throughout 2020, but as it stands, precious metal bulls will need another abrupt change of heart to get the recent uptrends back on track.