Gold Price Forecast: Major Drop in Sight as XAU/USD Tests Key Support

[MongiIG]

Jul 5, 2022 | DailyFX | Richard Snow, Analyst

GOLD (XAU/USD) ANALYSIS

• Aggressive monetary policy continues to hamper gold
• Recession concerns and lower US treasury yields to support gold in the short-term?
• Gold (XAU/USD) tests key support

AGGRESSIVE MONETARY POLICY CONTINUES TO HAMPER GOLD
Gold has taken a back seat since its sensational rise during the period of expansionary monetary policy in response to the global shutdown. This was a time of low, and in some cases negative interest rates, alongside mass liquidity injections (QE) and stimulus checks. In such environments, gold - a non-interest yielding asset - tends to thrive as other traditional interest-bearing investment options offer very little return on investment and even negative real returns.

The current macroeconomic landscape is way different now as global central banks reverse prior stimulatory policies in an attempt to calm surging inflation. Higher interest rates reduce gold’s allure as interest bearing investments and other alternatives start to become attractive once more.

RECESSION CONCERNS AND LOWER TREASURY YIELDS TO PROVIDE SHORT-TERM SUPPORT FOR GOLD?
US treasury yields and real yields, measured using the 5-year breakeven inflation rate, have dipped recently which may support falling gold prices for now. A lower breakeven rate assumes lower future inflation and less aggressive tightening, perhaps even looser monetary policy. Lower anticipated inflation attracts lower interest rate assumptions, which may offer support for gold.

Fed’s 5-Year Breakeven Inflation Rate

 
Source: Fred