Gold teetering as bond yields and dollar rip higher

Gold has a reputation of being of an inflation hedge and haven in uncertain times. But in an era where soaring bonds yields are not being driven by inflation concerns, at least according to what market-based measures are suggesting, it’s lack of yield makes it vulnerable when other haven assets – such as US Treasuries – are offering significantly higher returns. Throw in rapidly strengthening US dollar and it’s a toxic mix for bullion.

Source: Refinitiv

Gold succumbs to macro headwinds

Having managed to resist the stiffening macro headwinds for much of the past few months, gold finally succumbed this week, breaking below August’s nadir to the lowest level since March, triggering a death cross of the 50 and 200-day moving averages in the process.

Looking at the daily, gold finds itself teetering on channel support ahead of key economic data on both sides of the Atlantic, threatening to breakdown to the mid-$1850 region or lower. While it looks terrible, gold bulls it may be given a stay of execution on Thursday, helped by probable profit-taking in long USD and short US Treasury positions before US inflation data is released Friday.

While European CPI will also be released, the ECB has made near-term economic data largely redundant by suggesting in September that it has tightened monetary policy sufficiently to bring inflation back to target.

Upcoming data provides optionality for gold trades  

Unless you’re willing to speculate that gold may see a decent short-covering bounce, it may pay to wait to see the US data for a stronger signal as to which direction bullion may trend next. Channel support is currently located at $1874. A break of that would likely see a move towards $1858, the level it tested before breaking connivingly in March this year. The obvious downside target beyond there would be 2023 low of $1805 struck in February.

Should the US data undershoot expectations, which is a growing possibility given how rampant hawkish expectation have become, it would likely push the USD and bond yields lower. In turn, that should allow gold to perk up, potentially leading to a test of $1900 and perhaps even the 50-day MA which it has respected in the past.

If channel support holds on Thursday, a stop can be located either below or above for protection, depending on which way prices react to the data.

-- Written by David Scutt

Follow David on Twitter @scutty