Gold has held the level of $ 1,300 since December 2017. But the question is how long.
On May 15, gold not just slipped below its psychological level of $ 1,300 but closed below its 200-day moving average. Prior to this, it bounced from these levels five times in five months.
Since it has broken an important five-month support, technical metrics in a future market are not looking good. So, the question is why did gold break the five-month support. The culprits are higher interest rate and dollar. Interest rate and dollar both are heading higher, which is typically a bearish sign for the metal.
Ten-year US Treasury yield has been flirting with the 3 per cent mark since February. On May 15, it rose to 3.06 per cent, which broke the camel’s back — gold’s support levels. Thirty-year yield declined to a new low, suggesting rates are trending higher.
The Treasury yield has been trending up since September 2017. Ever since it broke the resistance of 2.45 per cent, it is going higher, keeping up pressure on gold prices.
The rise in interest rate is reflection of an improving US economy.
Rising rates increase the cost of carry in inventory and long position in gold. So, they are inversely correlated.
High interest rate is here to stay. The US are issuing massive debt in 2018 and 2019. Until now, the demand has been tepid. To issue new debt, a higher rate of return will only attract investors. I expect long term US Treasury yield to hit 3.25% within six months.
The dollar breaking new ground is another whammy for gold, along with higher interest rate. It is a potent bearish cocktail. Since gold is priced in the dollar, there is inverse price relationship between the currency and yellow metal.
As seen from the chart, the dollar has been trending higher since it broke the resistance of 90.80 since April 25.
Therefore, the combination of higher rates and dollar became too much for gold to handle, sending the yellow metal to a new low for the year.
The US Fed meet is coming up on June 13. Since the Fed is expected to raise rates, it is reasonable to think that another gold low cycle will come by before or during June. There has been classic “Sell during rate hike expectation and buy after rate hike event” in nearly every case since Fed started raising rates.
The following chart shows that whenever expectations for a rate hike are high, gold goes into selling mode and after a rate hike, we see gold bouncing back.
Gold has hit the bearish wall because of rising interest rates and dollar. It appears that the yellow metal is heading towards its biannual selloff where prices remain weak from May till July.
The US Fed event on June 13 will not help gold’s cause. We expect it to grind till $ 1,264 before we see a revival in prices. At present, gold is expected to remain weak till interest rate does not go below 2.90 per cent or the US dollar index slides below 91.
(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Readers are advised to consult their financial advisers before taking any position based on these observations)