The Bank of England’s inaction and dovish-leaning policy statement failed to halt the rally in UK bond yields. Similarly, US yields have continued higher even after the US Federal Reserve continued to project near-zero interest rates through at least 2023 in a dovish move yesterday, which initially sent the dollar tumbling and stocks rising. But both trends have since reversed noticeably, causing gold to reverse its gains while US technology stocks have also fallen back at the open today.
Rising yields and a rebounding dollar are a toxic mix for precious metals, and in particular for gold. This is because the opportunity cost of holding onto gold, an asset which pays no interest nor any dividend (and costs money to store), rises as yield-seeking investors could make better and arguably safer returns by holding government debt. Until such a time that yields stop rising, it is difficult to be positive on the outlook for gold, even if prices have now fallen to near their pre-pandemic levels, making them relatively inexpensive and dare I say, attractive for some long-term gold bugs.
Although Fed Chair Jerome Powell stuck firmly to a dovish message, repeatedly stressing interest rates won't rise until there's tangible evidence the economy has fully recovered from the pandemic, his words have fallen on deaf ears. Today, the US 10-year yields are printing new highs above the pre-pandemic high:
Source: ThinkMarkets and TradingView.com
So, yields remain on the front-foot and this should pressure lower-yielding and non-interest-bearing assets while this is the case.
As we had
anticipated on Wednesday, gold’s recovery attempt has been short-lived after prices went back below the bearish trend line, before forming what by the end of today’s session could be a large bearish engulfing candle on the daily time frame:
Source: ThinkMarkets and TradingView.com
The trend break failure is among the key price reversal topics I have discussed in
THESE educational YouTube videos, so make sure to watch those understand exactly how such failures work.
Meanwhile, with prices failing to hold above last week’s green candle, this suggests that we could possibly see prices go on to break below the previous week’s low next:
Source: ThinkMarkets and TradingView.com
Gold’s price action thus remains bearish and will only change when it starts printing higher highs and higher lows. Gold bulls will need to see those bond yields stop going further higher, before there is a fundamental trigger behind a potential comeback.