Gold, Silver To Retreat As Upward Momentum Drivers Lose Steam

During the past week, commodities have been losing some the positive momentum which drove most sectors to strong gains during August. Geopolitical concerns related to Syria and the selloff in emerging market currencies increased the demand for gold and silver despite the continued rise in real yields. With some of these drivers now fading, both metals have been running into profit-taking and as result, momentum has turned negative.

Turning negative
Both gold and silver have seen positive momentum for the past 18 and 22 days respectively but are now on track to turn negative today based on current prices. By doing that, they will join platinum and copper which both turned negative last week. Although key support levels at 1,350 USD/oz on gold and 22.84 USD/oz on silver have yet to be challenged, it highlights the fading bid from safe-haven buying at a time where the focus increasingly is turning to next Wednesday's US Central bank meeting where a reduction of its massive asset purchase program is still expected to be announced.

Investors have still not warmed to the idea of getting back into gold with holdings in Exchange Traded Products only up by 1.5 tons since August 7 during which time gold has rallied almost nine percent. Hedge funds have been major buyers of futures during this time but most of it has been short-covering which now leaves the market exposed to renewed selling should the fundamental outlook for gold turn negative once again.

Although momentum on gold is turning, the key support levels are yet to be tested. Gold is overall in a small downtrend within a major uptrend from the June 28 low. On that basis, a band of support can be found around 1,350 USD/oz with a potential break below signalling a revisit to the next level of support at 1,307 USD/oz which represents a 50 percent retracement of the rally from the June low.

Silver test
Silver has tested 23 USD/oz and found support on three occasions during the past week. With momentum fading, another test can be expected. If broken, the next support levels to look out for are 22.47 USD/oz and 21.60 USD/oz, both retracement levels of the rally from the June low.

US bond yields have risen strongly and the market has priced in a rise in official rates much sooner than the central bank would have us believe. On that basis any renewed weakness in US data as seen in last Friday's employment report and recent housing data due to higher mortgage cost may offer gold the best opportunity for a resumption of the August rally.

But until next week's central bank meeting, the price of both metals are back on the defensive and with momentum turning negative, the focus will turn to the above-mentioned support levels. If they break, a deeper correction could be looming.