Gold has come under increased pressure since the beginning of the year. By the beginning of March, quotes fell to the lows since June last year, threatening to surrender the next round level of $ 1700. It turned out to be the worst asset class in February, losing 3.7%.
In fact, gold broke the uptrend that formed in August 2018. Then the precious metal was an insurance against risks on stocks, and later its growth accelerated. All those two years, gold has been growing amid falling yields on long-term bonds, first on assurances that the Fed is taking a pause in tightening policy, and later on actual crisis rate cuts and the launch of QE.
For nearly two years from August 2018 to August 2020, declining 10-year bond yields fueled interest in gold. In August, the trend in the debt market changed, which drew a line under the demand for the precious metal in an attempt to move away from long-term real (after deducting inflation) yields.
However, it is important to understand that this correlation is not long term. US 10-year yields have fluctuated widely, but have maintained a downward trend since 2007, while gold rose rapidly through 2011, and then experienced four years of decline that nearly halved the price.
In addition, at the very end of February, the decline in 10-year yields was accompanied by an even more intense sell-off. Perhaps the golden beetles simply lost their nerves at the end of the month. But it is possible that it was only a short-term “technical” trade.
Buyers retreated when prices fell below $ 1,775. Earlier, at these levels, the final, most violent phase of growth began in July-August and a reversal to growth in November. In February, the so-called “cross of death” was formed, when the 50-day moving average falls below the 200-day, and the price was below this intersection. In fact, this signal gave rise to even greater pressure on quotes in the second half of February.
In the previous several times, gold fell for about two months after this important technical signal and lost up to 10%.
We are waiting for a signal from RSI
Another indicator, the RSI on the daily charts, is in the oversold area, dropping below 30 after declining all last week. Staying within the uptrend, gold quickly turned upward after reaching such oversold levels. However, during the bear market, rebounds from this area were insignificant, after which the decline could continue for months.
Therefore, a short-term bullish signal based on the RSI will only occur when a powerful bounce in price and a return of the indicator from the oversold area are combined. This is not a case where the course will turn slowly and carefully.
Government bonds and investor fears
Now let’s get back to the correlation with long-term government bond yields. Their upward reversal, although it looks like the normalization of long-term expectations by the markets, may act as an alarming signal of investor distrust. Yields rise when the price of bonds falls as investors sell them, demanding a higher premium due to fears of inflation.
In my opinion, inflationary fears are more justified than ever due to the nature of incentives that feed end consumers, and not financial institutions, as it was after the global financial crisis. It is easy to imagine a situation in which central banks will face such strong pressure on bonds that they will be forced to expand their QE programs, buying more and more securities. We have already seen this in Australia and South Korea – important export hubs for Asian countries.
If so, in the coming months, the ECB and the Fed may join in the control of yields on a longer stretch, which will be a new signal for a rise in gold prices. However, since then it runs the risk of being under pressure.
The $ 1,700 and $ 1,660 marks look like important milestones on the downward path. The first is a psychologically important round level. The second marks a 20% decline from the $ 2,075 peak, separating the bull and bear markets. In a bear market, an asset often loses another 10% -20% (equivalent to a decline to $ 1,500 or $ 1,330) before finding a foothold.
Read more predictions for March in Fortrader issue 128