(Kitco News) - After last week’s sharp selloff, the gold market has managed to reclaim the $4,000 level. While this is an important hurdle that needs to be cleared, one market strategist says the precious metal still has significant work to do to undo the recent technical damage.
In an interview with Kitco News, Michele Schneider, Chief Market Strategist at MarketGauge, said that she is watching the $4,000 level carefully as it could provide an attractive entry point. However, she added that patience is required as she sees significant signs that the gold and silver markets have broken.
Schneider, who has been a long-term gold bull, said that she currently holds no positions in either gold or silver. She explained that she took profits on her gold holdings in August and was subsequently stopped out of her remaining position. She has stayed on the sidelines ever since.
Her cautious stance on gold reflects growing concerns that gold has lost its traditional safe-haven appeal, even as the fundamental factors that drove prices to record highs earlier this year remain largely intact.
"The flight to safety in gold has been broken," she said.
Schneider noted that gold has struggled despite persistent inflation, rising government debt, geopolitical uncertainty and relatively modest changes in the U.S. dollar and bond yields. Last week, gold prices dropped more than 3% even as 10-year bond yields fell below 5% and the U.S. dollar weakened. (Kitco Global Index shows how much of today's gold move is the dollar versus the gold market itself.)
She explained that this divergence between gold's fundamentals and its price action is particularly concerning because commodity markets can experience prolonged periods of weakness after a major rally ends.
"We have not found the true support level in gold yet, and when we do, it doesn't necessarily mean it's the great buy opportunity, 'cause it will just be money you tie up for a long, long time until things recycle again," she said.
Schneider added that investors should not assume gold will automatically recover simply because the fundamental arguments supporting higher prices have not disappeared.
She warned that technical breakdowns can sometimes signal a fundamental shift in the marketplace that only becomes apparent later.
"What happens with the commodity story very often is that you look at the technicals or the trends, and it breaks down, and then the truth comes out later," she said.
One of the most significant changes Schneider sees is the renewed appeal of U.S. government bonds as a safe-haven asset.
She noted that falling bond yields have helped attract investors back into Treasuries, potentially reducing demand for non-yielding gold.
Schneider said she has established a long position in bonds, while MarketGauge's quantitative rotation model has also shifted toward Treasuries as broader financial markets move into a risk-off environment.
"Gold doesn't seem to be the big flight to safety. And now, all of a sudden, bonds are," she said.
Gold faces significant downside risks below $3,940
Looking at gold's technical outlook, Schneider identified $3,940 an ounce as a critical support level that could determine whether the recent selloff develops into a much deeper correction.
She warned that a sustained breakdown below that level could quickly push prices toward $3,500 an ounce, with the possibility of an eventual retest of $2,500.
However, Schneider is not ruling out a recovery.
She said that a move back above $4,000 could create an opportunity to establish a tactical bullish position, provided investors maintain strict risk controls. She emphaized that it would be important to keep risk management tight.
"I would be just as happy to buy if it gets back over 4,000, and then if it breaks back down, let's say, under that 3,980 level, risk about $20, $30," she said.
For longer-term investment opportunities, she said gold would become considerably more attractive if prices declined towards $3,000 or even $2,500 an ounce.
Silver could fall toward $35 an ounce
Schneider is equally cautious about silver, which has suffered even greater selling pressure during the recent market correction.
Despite silver's dual role as a monetary and industrial metal, she said its technical outlook remains weak, and she sees little reason to establish a position at current prices.
"Silver right now doesn't look all that great. I think it gets far more interesting another $15 lower," she said.
Schneider identified $35 an ounce as a potentially attractive level for silver, suggesting that the market may need to experience additional selling pressure before a sustainable recovery can develop.
She is also watching the gold-to-silver ratio, which she noted was trading around 80 during the interview.
According to Schneider, a rising ratio that favors gold generally reflects weakness across the precious metals complex. However, a sustained decline in the ratio could signal improving relative strength in silver.
She added that renewed investment in alternative energy and solar power could eventually support industrial demand for silver, although she does not yet see a compelling reason to buy.
"Neither one of these metals look particularly interesting to me," she said. "To me, I feel like gold and silver are guilty until proven innocent.”
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