Gold and silver prices have pulled back in the past few days as investors focus on next week’s Federal Reserve interest rate decision. Silver retreated to a low of $28, down by over 13% from its highest point this year, meaning that it is in a correction.
Gold has also retreated to the important support level at $2,500, a few points below the year-to-date high of $1,530. It has jumped by more than 55% from its lowest point in 2023 while silver has risen by 61% in the same period.
Gold and silver demand easing
The two metals have softened recently as signs show that their higher prices are hurting global demand.
A good example of this is in China, where the central bank has paused buying gold for four months in a row. Data released last week showed that the central bank held 72.8 million ounces of gold, currently valued at over $182 billion, making it one of the biggest holders of the metal.
The US holds over 261 million troy ounces of gold valued at over $500 billion. Most of this gold is stored in Fort Knox, Kentucky. Other large holders of gold are Germany, Italy, and France.
China has become one of the most aggressive buyers of gold in the past few years as it sought to diversify its reserves from the United States. For example, the country has been slashing its holdings of US Treasuries.
Its holdings have moved from over $1.3 trillion a few years ago to about $780 billion. It has been overtaken by Japan, which now holds over $1.1 trillion of gold holdings.
China and other big gold holders have benefited as its price has soared in the past few decades. Gold price has surged by almost 1,000% from its lowest level in 1999 and by over 6,200% since the US abandoned the gold standard.
Central bank demand for gold has been strong, especially after Russia invaded Ukraine, pushing the US to freeze the country’s dollar holdings.
Federal Reserve interest rates
Silver and gold prices have also eased a bit as investors focus on the actions of most central banks, which have started cutting interest rates. In Europe, the European Central Bank (ECB) has slashed rates once and is expected to do the same this week.
Similarly, the Bank of England (BoE) has already slashed once and is expected to repeat later this month.
The two have eased because the Fed is expected to slash rates by 0.25% instead of the previously expected 0.50%. Data released last week showed that the unemployment rate improved to 4.2% in August as the economy added over 114k jobs. Wage growth resumed growing during the month.
The next important catalyst for gold and silver will be Wednesday’s inflation numbers, which will provide more color on trends. Economists expect the data to show that the headline CPI eased to 2.6%, the lowest level in over two years.
If these estimates are correct, they mean that the Fed may decide to deliver a 0.50% cut as it continues focusing on the labor market.
Gold/silver ratio forms a double-top
Meanwhile, the gold/silver ratio has been in a slow upward trend in the past few months. It jumped from a low of $72.80 in May to a high of $90 in August. Most recently, however, the ratio has formed what looks like a double-top chart pattern, a popular bearish sign.
This means that the gold/silver ratio may soon have a bearish breakout in the coming weeks. A low ratio is often a sign that gold is relatively cheap compared to silver.
Gold price forecast
Gold price chart | Source: TradingView
Turning to the daily chart, we see that gold has been in a strong bullish trend in the past few months. As a result, it has remained above the 50-day and 100-day Exponential Moving Averages (EMA).
However, gold has formed a rising wedge chart pattern, which is shown in black. This wedge is nearing the confluence level, meaning that it is ripe for a bearish breakout since it is nearing its confluence level. If this happens, gold will likely drop to the 50-day moving average at $2,450.
On top of this, gold has formed a bearish divergence pattern as the Relative Strength Index (RSI) has formed a series of lower lows and lower highs.
Silver price analysis
Silver chart by TradingView
Silver has also pulled back in the past few weeks. It has dropped from a high of $32.47 to $28 and moved below the 50-day moving average. On the positive side, silver has formed an inverse head and shoulders pattern, which is a popular reversal sign.
Therefore, there is a likelihood that silver will continue rising as bulls target the neckline of the inverse H&S pattern at around $29.50.
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