- Gold continues to be undermined by rising dollar and yields
- Rising interest rate expectations reduce appeal of zero-yielding assets
- Metal is testing key support, but it could break it this time
Gold gave up its earlier gains yesterday to turn lower, leading to some follow-up selling first thing in the Asian session. The metal then bounced back more than $10 to go above $1,700 by the European open.
It was trading in the positive at the time of writing. However, I can’t help but feel more pain is on the way for precious metals investors, with gold having struggled all year to find its feet. It looks like a drop below last year’s low is almost inevitable.
Gold has proved to be a poor hedge against inflation and keeps getting hammered for two main reasons: the strengthening U.S. Dollar and rising bond yields. The greenback has been supported because of the Fed’s aggressive approach to tame inflation. The U.S. central bank has promised to deliver more aggressive rate hikes even at the cost of growth. As a result, we have seen the USD/JPY surge to repeated new multi-decade highs, while the EUR/USD has slumped below parity and the likes of the Aussie and cable have similarly struggled.
Investors are becoming more and more convinced that the Fed is going to raise rates by another 75 basis points this month and proceed with further aggressive hikes until inflation comes back under control.
Following Tuesday’s reversal, gold printed an inverted hammer candle on its daily chart as it found stiff resistance from the short-term bear trend and prior support area around $1,727. The metal is now deciding what to do at $1,700, where it has repeatedly bounced in the past. Given the progressively weak bounces off $1,700 support, and the outlined macro factors, the precious metal could very well break $1,700 decisively this time around.
Indeed, there are a few untapped liquidity pools that the bears are targeting. The first is below the July low at $1,680ish, while last year’s low is not very far either at $1,676. It is likely that a cluster of stop orders from trapped long traders may be resting below these levels. Thus, watch out for a potential run on these stops and thus a sharp move lower in the coming days.
Disclaimer: The author currently does not own any of the instruments mentioned in this article.