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Local retreat in gold

Jatuh Cinta

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Despite attempts at rebounding equity markets, moderate pressure on gold has persisted for the third consecutive trading session. This pressure is directly linked to rising long-term bond yields on US debt and several other developed countries.

Bonds and gold work like communicating vessels: rising real long-term yields draw capital to the debt markets away from gold. Over the last two years, the inverse correlation between gold and US 10-year Treasury yields has been very strong: gold prices peaked in August 2020, while yields rose from 0.5%.

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In our opinion, the potential danger for gold is a further tightening of the Fed’s tone, i.e. hints of new steps of a 75-point rate hike and a willingness to keep rates above inflation. But so far, we have seen a significant outperformance of inflation over key rates, and comments from FOMC members indicate a willingness to stop with a tightening in the 3.5-4.0% area, with no attempt to ride out inflation and a reversal to a rate cut as early as 2024. Such outlooks are keeping long-term bond yields in check and, at the same time fuelling interest in a strategy of buying gold during intense downturns.

Locally, creeping upward bond yields are working for sellers of gold. This also has a bearish signal in the form of consolidation below the 200-day moving average.

However, gold’s resilience drew attention when markets overestimated expectations of a rate hike from 50 to 75 points and multiple buying gains on dips under the 200-day moving average since December last year.
 

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