Author: Sir Amar – Technical Analyst

Gold prices fell sharply yesterday after peaking at $2000 on Monday as US yields surged on stronger-than-expected US housing data. The 10-year US real yield has now turned positive for the first time since 2020. Real yield and gold prices are said to be correlated at 0.82, trading in opposite directions. In other words, when real yields go up, gold goes down. Fed Jim Bullard said the Fed must act quickly to raise rates to 3.5% by the end of this year and a 75-basis point hike is not out of the question. However, the geopolitical situation could still offset aggressive rate hikes that act as a daily support structure for gold prices.

XAU/USD now is caught between two conflicting forces, with risk-off sentiment battling a further rise in US rate hike expectations. Intensified fighting in eastern Ukraine keeps risk-off sentiment alive while dovish Fed comments continue to support US rate hike expectations and the US dollar. Against these two prevailing forces, gold is struggling to find clear direction with sold rallies and bought dips. Monday’s rally and sharp sell-off left a bearish shooting star candle on the daily chart with a long upper shadow and a close near the daily low. This pattern suggests that the recent uptrend may be about to reverse.

Fed Chairman Jerome Powell is due to speak on Thursday and is expected to underpin expectations of multiple 50 basis point rate hikes at forthcoming Fed meetings. If he delivers on expectations, it could fuel further hikes in US yields and the US dollar. This increases the opportunity cost of holding non-yielding assets such as gold and increases the cost to foreign buyers of USD-denominated commodities and therefore poses a greater downside risk for gold.