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Gold at risk of reversing as banks gradually move towards tightening phase


MongiIG

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Rising chance of 2020 tapering a significant risk for gold, with the precious metal likely to lose ground if central banks start to tighten.

BG_resized_gold_2161981981.jpgSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 17 August 2021. IG

Gold lifted by declining treasury yields

Gold has been gaining ground over the course of the pandemic, with declining yields driving greater demand for the precious metal.

With central banks driving rates lower, the alternative havens have lost their shine to the benefit of precious metals. However, with the economic picture gradually improving and US president Joe Biden pushing for yet another multi-trillion dollar spending package, there are questions arising over how long this rally can last.

The long-term picture below highlights the trajectory of gold, with particular attention being paid to the post-2007 period. While we saw a long-lasting rally for gold in the face of drawn-out stimulus measures, that process has been significantly shorter for this crisis.

Looking at the 2012-2013 period, we can see that the threat of tapering saw the gold price fall sharply. That so-called ‘taper tantrum’ sent yields sharply higher, which comes to the detriment of gold given the increased resulting return associated with holding treasuries.

With elevated inflation pushing the Federal Reserve towards a 2020 tapering step, this raises questions over what happens to gold given that this represents the first step towards higher rates.

gold%20monthly.pngSource: ProRealTime

Falling yields and rates are good for gold

The chart below highlights how the long-term downward trajectory of gold and 10-year treasury yields have come to the benefit of gold.

By inverting the price of gold, we can see how the increase in gold has been simultaneously taking place as 10-year yields and Fed rates head lower. Notably, we typically see yields rise as the Fed raises their rates. Thus, with the prospect of tapering and ultimately higher rates next year, gold bulls should be hesitant for the period ahead.

The caveat to this is that the long-term trend is downward for yields and rates, thus benefitting gold. However, with rates around zero and yields at a lowly 1.23, some will question how much longer this downtrend can play out for. Perhaps it is just the case of gold outperforming as long as yields are minimal.

Nonetheless, while we have seen gold rise recently, there is a good chance that we could see price fall back over the course of the coming year to reflect rising rates and thus yields.

yields.pngSource: TradingView

Gold rises into Fibonacci resistance

The recent rise in gold has taken place within the backdrop of a downtrend from the June peak of $1916.

Despite this recovery, that bearish trend remains in place. The confluence of trendline and Fibonacci thus comes into play, with the potential for a bearish turn from here.

As such, watch out for a potential bearish reversal from this region, with a push up through $1916 required to bring a more positive outlook for gold.

gold%20daily.pngSource: ProRealTime

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