Yield’s trajectory stripping away gold’s lustre

GOLD prices have been on a rollercoaster ride, soaring to dizzying heights in May 2023, only to plummet in the subsequent months. The drop is largely attributed to the recent rallies in US Treasuries and the US dollar, which has raised expectations for Fed rates to remain “higher for longer”.

On the other hand, the impressive rally in gold earlier this year was an outcome of a liquidity crisis that shook the foundation of US banking, prompting investors to turn to gold as a safe investment.

Gold is eyeing a seventh weekly consecutive decline but may encounter a major technical support level below if the sell-off continues.

Looking at the daily chart for 2023, bullion breached the triangle consolidation pattern, observed in September 2023, moving towards the lower side. The immediate support zone of US$1,820 per ounce looks pretty plausible at this stage.

However, if gold does start to rise again, US$1,850 and US$1,900 stand out as potential areas of resistance, because they fall around key Fibonacci levels of 50 per cent and 38.2 per cent plotted between the triple bottom made in October 2022 to the immediate high in May 2023.

About a year ago, the US Treasuries rate was about 2.5 per cent, and gold was trading at around US$1,820.

Even after an increase in rates to 4.7 per cent, gold is still trading around the same level, primarily emphasising US$1,800-US$1,820 per ounce as a key support zone.

Both US treasuries and the US dollar continue to soar in an upward trajectory as the Fed’s resolve to bring inflation back into the acceptable range of 2 per cent keeps propelling the dollar index. This in turn weighs on the non-yielding, dollar-denominated bullion.

The yield curve is continuously sending some signals that gold investors should not ignore.

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While the immediate support may provide gold with some short-term stability, given the hawkish Fed commentary, the upcoming market sessions could become very interesting.

The drop from the mid-US$1,900 price levels to the low-US$1,800 price levels has been relatively very fast, underscoring the importance of considering the latest JOLTS readings.

These readings have fuelled the belief of a very resilient US labour market advocating the impetus for yet another hike by the Federal Reserve.

However, it is imperative to note that financial markets witnessed a lot of profit-taking in US stocks and other risky assets, including the bullion, in the last two weeks. This can be interpreted as prima facie proof of ailing consumer confidence.

As we move into the infamous month of October any drop in bonds can trigger fund flows back in the yellow metal especially since gold has arrived at the outskirts of the massive US$1,800 buy zone.

Markets seem engulfed in the possibility of more Fed rate hike pains and currently seem to disregard gold, which is typically considered a safe haven.

For now, “King Dollar” looks comfortable on the dominance throne, stripping away gold’s lustre and its reputation as a reliable investment. Any further inflationary pressures can trigger a further dive in the yellow metal’s prices, leaving it on a wishful outcome of a recession for gold to gain some traction.

Only time will tell if gold’s fortunes will be restored to its former glory.

Regardless of the outcome, one thing is clear – gold remains a timeless investment that has weathered countless storms throughout history.

So hold on tight, dear investors, and get ready for the ride of a lifetime.

The writer is senior market analyst at Phillip Nova