Gold analysis: Bullion feels the weight of rising Treasury yields – $1,600 in sight?
15:28, 20 October 2022
The price of gold might come under renewed selling pressure as yields on 10-year US Treasury bonds have risen to levels unseen since June 2008, and as persistently high inflation continues to keep the Federal Reserve in a remarkably hawkish stance.
Prices for gold were largely unchanged this week after falling by 3% last week. Yet they hit an intraweek low of $1,622/oz, perilously close to the 2022 lows of $1,615 seen in late September.
As US real yields continue to trend upward, macro headwinds for gold will persist until the Fed approaches the end of its hiking cycle.
Technically, previous attempts to re-test 2022 supports have all resulted in price action breaking through to the downside and hitting new lows. If bearish momentum intensifies, gold may breach the psychological level of $1,600/oz and then try to seek support in the $1,550 area.
Gold struggles in a positive real-yield world
This week, real yields on 10-year US Treasury inflation-protected securities (TIPS) reached 1.74%, the highest level since 2009.
A 10-year real yield of 1.74% means that an investment in this TIPS will give a return that is 1.74 percent higher than U.S. inflation for the next 10 years. Inflation in the US is expected to average 2.4% over the next 10 years, according to a market-based measure of long-term inflation expectations, or Breakeven rate.
Gold has a tough time when US Treasury real rates are rising, as investing in the bullion yields no interest. Due to this factor, the traditional negative correlation between gold and US real yields still holds true today, as illustrated above.
Real yields reflect Fed monetary policy aggressiveness: the greater the Fed's willingness to raise interest rates, the higher the real yields.
September US inflation data, which was released last week, was a glaring letdown for gold bulls hoping for a swift Fed reversal. Inflation measured at the headline level came in at 8.2% year-on-year, down from 8.3% in August; however, core inflation continued to kick higher to 6.6%, up from 6.3% in August and exceeding market expectations of 6.5%. US core inflation is at its highest level since August 1982, and its rising trend continues to justify the Federal Reserve's ultra-hawkish stance.
Money markets are pricing in an increase of 75 basis points in November, followed by a hike of nearly 70 basis points in December, with US interest rates expected to peak at 5% in March 2023. Further declines for gold are likely if investors' expectations for future rate increases continue to rise from here.
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Gold price analysis: Key levels to watch
On the gold daily chart, the price action is testing the bearish trendline from October. If the bearish momentum picks up again, the possibility of a retest of the 2022 lows at $1,614 might come next.
Price breakdowns have consistently occurred in previous attempts to test 2022 lows. The support level of $1,784 was breached by gold early in July, and then the bullion continued its decline for another 5.7% to reach $1,680 on July 21.
The support level of $1m680 was broken by the bearish price action once again on September 15, which was followed by a decline of 4.1% to reach the lows of $1,614.
A break below $1,614 could set the stage for another leg of gold's decline, with the possibility of a return to the $1,560-1,570 region (end March-early April 2020 support).