Game Changer or Bitter-End Rally: Assessing the Dead-Cat Bounce Phenomenon

Outlook for Gold, XAU/USD, Silver, XAG/USD

• Gold and silver have experienced a significant surge in response to escalating geopolitical tensions.
• Both gold and silver are currently testing major resistance levels.
• What is the outlook for XAU/USD and XAG/USD, and what levels should we be monitoring?

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The recent sharp bounce in gold and silver has raised the question of whether it’s time to reconsider the bearish outlook. While this could potentially alter the game, it may be prudent to wait for confirmation before definitively identifying a trend reversal.

XAU/USD has reached a three-month high primarily due to increased tensions in the Middle East. The scaling back of hawkish rhetoric from US Federal Reserve officials has indirectly supported gold by keeping the global USD in check. If the rise in gold is largely driven by geopolitical concerns, it would be difficult to argue for a sustained rally in precious metals. Fundamentally, the factors that have pushed gold lower in recent months, such as a strong US economy and rising US yields/real yields, remain intact.

While it is true that a number of US Federal Reserve officials have adopted a less hawkish stance in response to the recent spike in long-term yields, the tightening of financial conditions reduces the need for immediate tightening, but does not necessarily imply a complete Fed pivot, as Federal Reserve Chair Powell suggested on Thursday.

XAU/USD Weekly Chart

Chart Created by Manish Jaradi Using TradingView

Gold: Testing Key Hurdle

From a technical perspective, gold is currently testing a crucial resistance level at the July high of 1987. A decisive break above this level would confirm a fading of the downward pressure witnessed in recent weeks. Such a break would prompt a reevaluation of the bearish outlook. Additionally, a breach of the May high of 2072 would signal a shift to a bullish medium-term outlook.

Deeply oversold conditions (RSI below 20) earlier this month triggered a rebound from strong converged support at the 200-week moving average, around the February low of 1805, and the lower edge of a rising pitchfork channel from 2011.

XAG/USD Daily Chart

Chart Created by Manish Jaradi Using TradingView

Silver: Testing 200-DMA Ceiling

Silver is currently testing major converged resistance levels, including the 200-day moving average, the late-September high of 23.75, and the upper edge of the Ichimoku cloud on the daily charts. XAG/USD needs to surpass the 23.25-23.75 range for the immediate downward pressure to dissipate.

From a slightly broader perspective, as highlighted in the Q4 outlook, XAG/USD needs to break above the 25.50-26.25 resistance range for the outlook to become constructive. Refer to the articles “Gold Q4 Fundamental Forecast: Weakness to Persist as Real Yields Rise Further,” published on October 6, and “Gold/Silver Q4 Technical Forecast: Tide Remains Against XAU/USD & XAG/USD,” published on October 1.

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— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish