Gold has been stuck trading broadly sideways now for over a week. The key driving factors are facing some counterbalancing pressures which all adds up to gold doing very little. However, we still see this as a near term position and continue to favour short positions over the medium term.
- Treasury yields moving higher and the US dollar (USD) is strengthening. These are negative for gold.
- However, inflation pressures have picked up sharply and for now, this is helping to mitigate the downside pull on gold.
- We remain negative on gold for the medium-term outlook
Rising bond yields and a strengthening of the USD are negative for gold
There are several interesting market metrics to look for when assessing the outlook for gold. Bond yields (we look at the US 10 year Treasury yield) are rising and the USD is strengthening. Both of these have negative correlations with the performance of gold.
The US 10 year yield has been moving higher since early August, with the gold price falling away since then. The correlation averages -0.35 since the beginning of 2020, which is fairly strongly negative. In other words, when yields go up, gold moves down.
There is an even stronger negative correlation between the USD and gold. The dollar has been strengthening since June but there has been a real leg higher again since September. This has coincided with Gold falling from $1834 again. The negative correlation averages -0.42 since 2020. Again, this suggests USD strength is negative for gold.
Rising inflation is helping support gold
However, the interesting aspect to factor in is inflation. Rising inflation fears seem to have been the main driver of bond yields moving higher in the past two weeks. Treasury yields are higher, but the move seems to have been more than mirrored by rising inflation fears (shown in the rise in the US 10 year Breakeven Inflation rate, which are effectively the market’s expectations of US inflation).
This has dragged “real” bond yields lower. Real yields are bond yields minus inflation. If inflation increases more than bond yields do, this would pull real yields lower. This seems to be what we are seeing right now.
Technically, Gold remains under pressure
The technical analysis of gold suggests that near term strength should continue to be seen as a chance to sell for medium-term downside. The past few weeks have seen the old support around $1780 turning into new resistance. Momentum indicators are also correctively configured to suggest that near term rallies will struggle.
On a medium-term basis, there is the overarching 14-month downtrend now falling at $1834 key resistance. There is also a series of lower highs that are focusing the price towards another test of the key medium-term support at $1675. We are sellers into near term strength which fails in the resistance band $1770/$1790.
A rally above $1810 would improve the outlook, but the medium-term sell into strength position continues until $1834 resistance is breached.