Gold Prices Eye Bullish Turnaround, Silver’s Outlook Clouded by Recession Fears

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Most Read: Gold Prices Coil as Inflation and Recession Odds Send Conflicting Signals

Gold prices (XAU/USD) suffered moderate losses in the last five sessions, down around 0.6% to $1,830, falling for the second consecutive week amid weakness in the commodity complex, but with the decline likely contained by increased recession angst. Silver (XAG/USD), meanwhile, also performed negatively, but posted a larger drop on worries that an economic slowdown will cool demand for raw materials with industrial applications.

Looking ahead to next week, the trajectory of gold and silver may show some divergence, even though the two assets tend to trade in parallel due to their similar safe-haven characteristics and comparable sensitivity to interest rates. That said, there is a chance that gold could stabilize and trend upwards, but silver will struggle to regain much ground. Let's take a look at why.

In the coming days, there will be several high-impact events on the U.S. calendar, including May Durable goods orders and June ISM Manufacturing. Preliminary numbers from regional surveys and the S&P Global PMIs reports suggests incoming data will likely surprise to the downside, raising the specter of a recession in the world’s largest economy.

Fears that the U.S. is headed for a hard landing may bolster demand for investments that tend to maintain their value or appreciate during market turmoil. This narrative can also put downward pressure on U.S. interest rates, or at least prevent them from rising significantly.

After the FOMC raised borrowing costs by 75 basis points to 1.50-7.75% at its June meeting and signaled that it would follow through on its plans to frontload hikes, Treasury yields have started to pullback from their cycle highs on concerns that tightening financial conditions will trigger a downturn, before leading a policy pivot. These expectations are likely to firm in the near term if economic data continue to deteriorate, a scenario that seems likely at this point.

With yields repricing lower and appetite for defensive positions on the rise, gold appears well-placed to mount a decent recovery in the near term. While these two factors can also buoy prices for other precious metals, silver will struggle to rip benefits on concerns that a potential contraction in domestic output will significantly dampen demand for industrial metals. For the above reasons, XAU/USD could trade with a slightly bullish bias at the tail end of the month. XAG/USD, for its part, has a neutral to slightly bearish profile.

From a technical perspective, gold volatility has come down in recent weeks, with the metal entering what seems to be a consolidation phase and trading within the $1,875/$1,805 range over the past couple of months. With XAU/USD now moving towards the lower limit of that interval, traders should carefully watch price reaction to determine the possible near-term direction. That said, a break below $1,805 could open the door to a pullback towards $1,780, followed by $1,755.

On the flip side, if gold prices begin to trek upwards, as suggested by the fundamental analysis, initial resistance appears near $1,860, an area defined by the 50-day simple moving average and a descending trendline extended off the March high. If the bulls manage to clear this barrier, we could see a rally towards $1,880. On further strength, the focus shifts higher to $1,895, the 38.2% Fibonacci retracement of the March/May decline.

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Gold Prices Chart Prepared Using TradingView

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