Gold decline set to extend as inflation narrative takes a back seat
Tony Sycamore June 18, 2021 3:50 AM
The hawkish shift by the Federal Reserve has left a strong imprint on some asset classes. While others like equities have remained untouched and have continued to go about their business as they were previously.
Commodities including gold have been amongst the hardest hit. In this article we examine the reasons behind the sharp fall in gold and what lies ahead for the yellow metal. I will start by examining the impact of the Feds pivot on the interest rate market. From here we will draw a line between interest rates, the US dollar and connect the reasons behind golds sharp decline.
Learn more about trading commodities here
The Feds projected earlier start to interest rate hikes indicates less interest rate hikes will be needed than if rate hikes commenced later in the cycle. This has contributed to real yields rising sharply over the past 48 hours from deeply negative levels.
Real yields are nominal yields minus the rate of inflation. As can be seen on the chart below, golds appreciation since the beginning of 2019 has coincided with a move lower in real yields and accelerated as real yields slipped into negative territory during the pandemic. It can be concluded the sharp rise in real yields the past 48 hours has contributed to this week’s sharp sell-off in gold.
The rise in front end US yields has supported a 1.50% rise in the US dollar index, the DXY over the past 48 hours. As can be viewed on the next chart below, the US dollar and gold are negatively correlated. This means a stronger US dollar is a head wind for gold.
For as long as real yields continue to move higher, along with a stronger US dollar it is a combination likely to put the inflation narrative that supports gold in the back seat for the time being.
Technically, the break below support at $1850/40 earlier this week resulted in a shift from a positive bias to a neutral bias and the break below $1800 presents a more negative outlook.
Based on this and the shifts outlined above, the expectation is for gold to test weekly uptrend support in the coming weeks at $1725, coming from the May 2019, $1266 low.
Source Tradingview. The figures stated areas of the 18th of June 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. 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.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.