A Dead-Cat Bounce or Game Changer?

Gold, XAU/USD, Silver, XAG/USD – Outlook:

• Gold and silver have jumped on account of escalating geopolitical tensions.
• Both gold and silver are testing major resistance.
• What is the outlook and what are the key levels to watch in XAU/USD and XAG/USD?

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The sharp bounce in gold and silver recently has raised questions on whether it is time to reassess the bearish outlook. While this could indeed be a game changer, it might be worth waiting for a confirmation before concluding a trend reversal.

XAU/USD has hit a 3-month high due largely to escalating tensions in the Middle East. The downshift in hawkish rhetoric from US Federal Reserve officials has kept a lid on the global USD, indirectly benefiting gold at the margin. If the jump in gold is largely explained by geopolitical concerns, it would be hard to argue for a case of a sustained rally in precious metals. From a fundamental perspective, the key drivers that have driven gold lower in recent months remain intact – solid US economy and rising US yields / real yields.

Granted, quite a few US Federal Reserve officials have shifted to a less-hawkish tone given the recent jump in long-term yields. The tightening in financial conditions undoubtedly reduces the need for imminent tightening, but probably not a Fed pivot, which Fed Chair Powell seemed to indicate on Thursday.

XAU/USD Weekly Chart

Chart Created by Manish Jaradi Using TradingView

Gold: Testing key hurdle

On technical charts, gold is testing crucial resistance at the July high of 1987. A decisive break above would confirm that the multi-week downward pressure had faded. Such a break would warrant a reassessment of the bearish outlook. Furthermore, a crack above the May high of 2072 is turning the medium-term outlook to bullish.

Deeply oversold conditions (RSI below 20) earlier this month triggered a rebound from strong converged support on 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 testing major converged resistance on 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 cross the 23.25-23.75 area for the immediate downward pressure to fade.

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

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— Written by Manish Jaradi, Strategist for DailyFX.com

— Contact and follow Jaradi on Twitter: @JaradiManish