Gold and Silver face heavy selloff as trade tensions between US and China ease

Gold and Silver have been garnering a lot of attention in recent weeks as they staged an impressive rally that led the precious metals to break several record highs. The momentum was driven by a combination of factors, including safe haven demand on the back of escalating geopolitical tensions and fiscal constraints, expectations of lower rates from the Federal Reserve, and improved fundamentals.

However, the upside has run out of steam this week, with silver shedding around 5% at the time of writing and gold dropping 2%. The trade had become quite overcrowded and was running a little hot considering the levels both markets were at, so a reversal is not entirely out of the blue. The catalyst for the pullback has been the perception of easing tensions between China and the US after Trump said that he expects to make a trade deal after meeting with President Xi Jinping at a Pacific Rim summit in South Korea later this month. Ten days ago, Trump surprised markets by announcing that he would impose 100% tariffs after China said it would limit its rare earth exports. As the days have gone by, positioning suggested that markets were expecting a de-escalation before the actual tariffs would apply at the end of this month, but gold and silver remained bid as a “fail-safe”. 

The confirmation of willingness to resolve the issues has been enough to remove some of the risk premia in markets, at least for now. As mentioned above, both gold and silver were primed for a pullback so there is likely some profit-taking which has deepened the reaction. The fundamentals haven’t changed, with long-term support still in place, however, the strength of the rally over the past month was somewhat unjustified, leading to the chance of a deeper pullback on the back of this news of positive trade developments.

For silver, the supply shortage is likely to remain a significant driver in the next twelve to eighteen months as demand from the renewable energy sector expected to increase. Further rate cuts from the Federal Reserve will also provide further tailwinds, however, there is still a risk that the pace of rate cuts will not be as fast as markets are expecting, which could provide another opportunity for sellers to gain the upper hand. For now, the pullback seems to have found support at $49 with the RSI having slipped back to its lowest level since mid-August after months of persistent overbought conditions. There could still be some further downside momentum towards $48.45 however, dip-buying is also a possibility as traders focus on the longer-term outlook.

Silver (XAG/USD) daily chart

Past performance is not a reliable indicator of future results.