Precious Metals May Be On The Verge Of A Big Move

London (June 1)  Precious metals experienced a wave of selling this past week as bullish investors shunned safe haven assets and bid U.S. equities to all-time highs. Expectations of stimulative action by the European Central Bank next week caused the U.S. dollar to rally against the euro, which also contributed to the precious metals selloff.

For the past year, gold and silver have remained within a trading range after plunging in the first half of 2013 in expectation of the tapering or gradual ending of the Fed’s QE3 program. Both metals appear to be forming a type of wedge pattern that could foreshadow a sharp “breakout” move in either direction when the next important catalyst eventually presents itself.

Silver is coiling up like a compressed spring as its trading range narrows to a very fine point. The key $18.50 support level marks the bottom of this trading range or wedge pattern, while the two diagonal downtrend lines mark the resistance levels of this pattern. When volatility eventually makes a comeback, silver may break either its support or resistance levels and is likely to make a sustained move in the same direction of this initial breakout.

Gold’s trading range is much wider than silver’s range, which means that a breakout in either direction is less imminent. For now, momentum appears to be biased toward the downside as the lower support level is attracting prices to it like a magnet. Like silver, an eventual break of either the support or resistance levels of this trading range is likely to foreshadow a sustained move in the same direction as the initial breakout.

The U.S. Dollar Index appears to have experienced a bullish technical breakout in the past few weeks as the ongoing tapering of the Fed’s QE3 program and the likely launch of the European Central Bank’s stimulus plan next week helped to simultaneously strengthen the dollar while weakening the euro. Precious metals and the U.S. Dollar Index have a strong inverse relationship, so the Dollar Index’s bullish breakout increases the chances of a bearish trading range breakdown in precious metals.

(Source: Forbes)