What is "wrong" with gold?

Heading into tonight’s crucial CPI data, gold is trading lower for a fourth consecutive week and has lost ~ 8% from its April 18, $1999 high.

Gold 4

Heading into tonight’s crucial CPI data, gold is trading lower for a fourth consecutive week and has lost ~ 8% from its April 18, $1999 high.

After topping in early March at $2070 after the Russian invasion of Ukraine, the decline in gold accelerated in mid-April after a stream of hawkish Fed Speakers raised expectations of a more aggressive hiking cycle.

While there was initial relief after the May FOMC that Fed Chair Powell downplayed the possibility of a 75bp rate hike, he did pre-signal two inflation-busting 50bp rate hikes at the upcoming FOMC meetings in June and July.

The Fed’s more aggressive super tightening cycle, which is expected to take the Feds Fund target back above 3% by early year, has undermined the value of gold for two key reasons outlined below.

Peak inflation

Gold is viewed as an inflation hedge to protect against the debasement of fiat currencies. As can be viewed on the chart below, both inflation and gold have rallied in tandem until recently.

Gold has turned lower, likely pre-empting a slowdown in inflation as early as this evening’s U.S CPI print. Headline inflation for April is expected to slow to an annual rate of 8.1%, down from a 40 year high of 8.5% in March. The core inflation rate is expected to fall from 6.5% to 6%.

gold vs inflation

Positive U.S real yields

In late November, the renomination of Fed Chair Powell over Fed Governor Lael Brainard was considered a hawkish development and the catalyst for real yields to move away from the deeply negative levels of early November (-117bp).

Overnight, U.S. 10-year real yields (the interest rate adjusted for inflation) closed at +30 points. It is noticeable that the downside move in gold accelerated in mid-April as real yields moved from negative into positive territory.

Positive real yield undermines demand for gold because gold yields nothing. Real yields are expected to continue to move higher while the Fed maintains its hawkish stance.

gold vs real yields

What do the charts say?

In an article on March 18 here we described the reversal pattern from the $2070 high as “tweezer/double top that could turn out to be one for the ages.” It is also noticeable gold completed an Elliott Wave five wave advance from the $1046, 2015 low.

The ensuing pullback has seen gold slip towards weekly uptrend support near $1830/20. This level is likely to provide initial support. However, if gold does see a sustained break below $1820ish the risks are for a deeper pullback towards range lows $1700/$1670 into year-end.

gold weekly

Source Tradingview. The figures stated are as of May 11, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

How to trade with City Index

You can trade with City Index by following these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the company you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.