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Gold and silver prices are oversold now: time for buyers to step in?

By Piero Cingari

13:40, 16 May 2022

Gold bars on US dollar bills with bear figure
Silver and gold looking oversold: should the bulls buy the dip?

According to the 14-day Relative Strength Index (RSI), one of the most widely used technical indicator to assess market momentum, both gold and silver prices entered oversold levels in mid-May 2022, dipping below the 30 mark – a condition not seen since the two precious metals crashed in August 2021. 

Gold prices have plummeted nearly 12% from their relative highs on 8 March, while silver officially has entered a bear market, with a drawdown of more than 20%.

Rising US real interest rates and a strengthening US dollar (DXY) amid a more hawkish Federal Reserve have been the key reasons weighing on gold and silver prices, with market risk aversion recently exerting further downward pressure.

A recession is a wild card for gold and silver to relieve the pressure on expectations of higher US interest rates and thereby reverse the market’s current pessimism.

But are we truly on the verge of a gold and silver bearish trend reversal, or is this merely a forewarning of even greater drops in the coming weeks?

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Gold and silver prices hit extreme bearish momentum in May 2022

a chart showing extreme oversold condition in both gold and silver Gold and silver 14-day RSI as of 16 May 2022 – Photo: / Source: Koyfin

Why the dollar should fall to reverse gold and silver's bearish trend

One of the primary causes driving the current weakness in gold and silver prices was the rising of the US dollar, with the DXY index achieving its highest level in over 20 years.

Inflation in the United States remained at 40-year highs of 8.3% in April, prompting the Federal Reserve to raise interest rates by 50 basis points to 1% in May, and to signal further increases in the future, while a deteriorating global economic outlook, driven by Chinese lockdowns, pushed safe-haven demand for the greenback.

Stars have aligned for the dollar surge, but gold and silver have seen worries of increased interest rates materialise, driving the demand away.

As such, for the bearish trend in gold and silver to reverse, the dollar must lose its grip. This can only happen if market expectations about Federal Reserve interest rates hike slowdown, which usually occur when investors begin to price in a recession.

However, a US economic slump may be still too far down the road…

US dollar vs gold and silver performance since 8 March 2022

a chart showing the US dollar vs gold and silver performance since 8 March 2022Performance of the US dollar against gold and silver since March 8, 2022 – Photo: / Source: Tradingview

Gold and silver are in a bloodbath: should you buy the dip now?

Momentum on these two metals is extremely bearish, as market consensus believes the Fed will raise interest rates to contain inflation.

Oil - Brent

80.53 Price
+0.180% 1D Chg, %
Long position overnight fee 0.0050%
Short position overnight fee -0.0269%
Overnight fee time 22:00 (UTC)
Spread 0.032

Oil - Crude

75.74 Price
+0.160% 1D Chg, %
Long position overnight fee -0.0165%
Short position overnight fee -0.0054%
Overnight fee time 22:00 (UTC)
Spread 0.030


2,045.50 Price
+0.380% 1D Chg, %
Long position overnight fee -0.0196%
Short position overnight fee 0.0114%
Overnight fee time 22:00 (UTC)
Spread 0.50


25.38 Price
+0.360% 1D Chg, %
Long position overnight fee -0.0199%
Short position overnight fee 0.0117%
Overnight fee time 22:00 (UTC)
Spread 0.020

As a result, if the Fed continues to raise interest rates and to signal a more restrictive monetary policy, gold and silver’s current negative trend may persist.

Traders should bear in mind that precious metals are non-yielding assets that do not provide any regular interest payment, so when cash begins to give greater yields, gold and silver tend to suffer.

Silver is 56% below its all-time high, gold only 12%

a chart showing drawdown levels in gold and silverGold and silver drawdowns from peaks – Photo: / Source: Koyfin


But what if the unexpected occurs?

The advent of two specific economic situations, which do not appear to be adequately priced by the market today, can act as a wild card for gold and silver.

The first is the Fed’s failure to manage inflation through rate increases. In this event, the dollar would continue to provide negative real returns, and investors may begin to lose faith in the currency and shift to real assets such as stocks and commodities.

The second is the sign of a Federal Reserve policy mistake, which, by excessively tightening financial conditions, would actually force the economy into a recession.

As a result, investors may consider precious metals to be an insurance against both the danger of out-of-control inflation and policy errors that lead to a recession.


Markets in this article

2045.50 USD
7.76 +0.380%
25.380 USD
0.092 +0.360%
US Dollar Index
103.022 USD
-0.149 -0.140%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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