What’s Going On With Gold?
Why the sharp fall this week?
Gold has been touted as an inflation hedge and as a stagflationary play which are two major influences in markets. So, if you just considered those two factors you may be asking yourself, why is gold not roaring higher? Earlier this week gold took out a key reversal area and invalidated a decent technical reversal signal. See the earlier post in the week.
What’s pressuring gold lower?
The reason for gold remaining pressured lower is due to the interplay between real yields and the USD. Now, many traders know that strength in the USD is a headwind for gold. This provides part of the reason for gold’s weakness. The USD index surged above 106 in a surprise move after the US returned from the July 04 holiday. This was a key driver for gold’s move lower. On top of this real yields are still elevated. It is a strong USD and relatively elevated real yields which are keeping gold prices pressured. Look at the chart below (gold is in yellow, TIPS is in blue, and DXY is in purple).
What needs to change for gold to gain again?
What gold buyers are looking for is an environment where real yields and the USD are both falling. When this happens gold tends to gain. This is a helpful summary:
- * Rising real yields and rising USD = gold pressured,
- * Falling real yields and falling USD = gold upside.
As long as this dynamic between yields, inflation, and the USD remains then gold traders should pay careful attention to it in reference to where future gold prices might go.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.