Gold bulls have been conspicuous by their absence in 2021. The remotest hint of buying pressure is quickly snuffed out. The fundamental drivers are negative and on the charts, the technicals have been looking pretty bad too. The latest rebound brings gold once more to a crossroads and leaves the bulls with a familiar question: “Do we trust this recovery?”. Whilst the US dollar (USD) continues to find its recovery strength, the answer will invariably be: “No!”.  

  • Fundamentally, a stronger USD and higher US bond yields continue to negative for the gold price.
  • The technical analysis remains bearish on a medium-term basis, with near-term rallies continually used as a chance to sell. 
  • The potential for this change in the near to medium term is not good. 

Higher US bond yields hit gold

Being a scarce commodity, the price of gold can be driven by a whole range of factors. Supply of mining, demand for the physical asset, and central bank purchases can all play a role in the price direction. However, the key considerations from trading gold are where the direction of US interest rates (in other words, bond yields) and USD strength. 

Gold is a zero-yielding asset (it pays no interest rate) and so when US bond yields (that do pay interest) move higher, the opportunity cost of owning gold increases. It is better to own bonds than gold because bonds give you a better return. 

So with bond yields rising strongly in recent months, the price of gold has been falling. The chart below shows a consistent strong negative correlation between US bond yields and gold. The more bond yields go higher, the longer gold will struggle.


US dollar strength hits gold

A similar picture can be painted with USD and gold. Gold is priced in dollars, so when the USD strengthens, it makes gold more expensive in other currencies. Therefore, the gold price in dollars falls.

In the early months of 2021, we have seen a stronger USD. Subsequently, selling pressure has grown for gold. The chart below shows the correlation between gold and the Dollar Index (DXY) has been persistently and strongly negative. The longer the dollar strengthens, (or at least does not get sold off) the longer gold will struggle.  


The technical analysis remains negative

This is also reflected in the gold technical analysis. Since July 2020, there have been several phases of gold declines, with lower highs and lower lows. In 2021 this has formed a downtrend channel, where phases of recoveries lasting three or four days have been seen as a selling opportunity.

Technical momentum indicators show this, with the 14-day Relative Strength Index (RSI) consistently failing under 50 and moving down towards 30.


We expect this selling into strength to continue. The latest rally into a band of resistance between $1740/$1765 and the top of the downtrend channel should give another chance to sell. 

How does change?

We are likely to see gold continuing to struggle over the coming weeks. This will last until we see bond yields consistently dropping back, and the USD weakening again. 

US bond yields show little sign of stopping their advance whilst the massive fiscal and monetary stimulus programs from major governments and central banks continue. Furthermore, it may not be until the second half of 2021 when we see the USD falling back again. So it may be a while before the gold bulls can return with any real confidence.