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Gold breaks $1300 as yields surge…but don’t write off metal yet

Updated  May 15, 2018 12:01:03 PM Written by Fawad Razaqzada



After a rather quiet start, things got livelier around midday in London as benchmark government yields started to climb higher – slowly at first before picking up momentum as US traders joined the fun. The dollar caught a bid while US index futures dropped amid concerns over rising interest rates. There wasn’t an awful lot of data to cause the wild moves, with UK wages coming in line with the expectations while the upward revisions in US retail sales numbers for March helped to offset the slightly weaker April figures. As a result, the dollar remained bid and in the greenback’s slipstream, the GBP/USD dropped below 1.35, EUR/USD came to within 20 pips of 1.18 handle and most notably, gold took out $1300 support. At the time of this writing, though, the dollar was easing back a little, but stocks remained under pressure as yields stayed elevated.

Yields surge weighs on noninterest-bearing assets, stocks

The pressure on gold was actually building up even before the US data hit the wires. Despite the weakness in the stock markets, the perceived safe haven metal finally took out the liquidity that was resting below $1300 in a sharp move as the bulls lost control of the 200-day average support at $1306. Sentiment turned negative towards gold ever since government yields started to push higher. As the benchmark 10-year US debt yield climbed above 3.06% today, it made little sense for speculators to buy something that pays no interest.

Could gold make a comeback?

But if yields ease back now then the precious metal could recover some lost ground over the coming days. Otherwise the only hope for dollar-denominated gold is a potential correction in the greenback now. We think that the pound and euro may be slightly under valued at these levels. If we are correct and the EUR/USD and GBP/USD do turn around soon then there is a possibility for gold to also find some buyers. Also, gold being an inflation hedge, could find support in its physical form in the event price levels rise further.

However, the technical bias is now clearly bearish given the breakdown of key support at $1300. If this breakdown is sustained, we could see gold drop to the 61.8% Fibonacci retracement at $1286 next, before it has any chance of a comeback. However, it would be bullish if the now broken $1300 level is reclaimed decisively. Specifically, if the price of the yellow metal goes back above the $1302-$1308 resistance range then today’s sell-off could be considered a false break to trap the sellers. The longer-term outlook will turn bullish if gold were to go on and break the most recent swing high at $1325. But for now, the path of least resistance remains to the downside.  

Source: eSignal and FOREX.com.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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