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Gold is trapped between a rock and hard place

15 Sep 2022 12:10 PM

Gold is arguably the oldest interment tool in the world, and with that it has a long track record of being a safe haven asset, whereby if uncertainty descends upon the markets, funds are ploughed into the metal. In the wake of the 2007-08 global banking crisis, gold enjoyed a phenomenal rally. In the June 2007, when stock markets were at their then peak, gold was trading in the region of $650, by late 2009 it was north of $1150. The commodity traded above $1,900 in 2011 when the US lost its AAA rating, and as the world economy recovered in the years that followed, gold retreated, and this coincided with equity markets rising.

Another factoring impacting gold is the US dollar as the metal is traded in dollars, so depending on the greenback, the gold market can experience major moves. Part of the reason why gold surged in the wake of the banking crisis was because the Federal Reserve devalued the US dollar. In turn, gold underperformed in the 2014-2016 era because the Fed started to signal, they would start to hike rates, which they did in late 2015 – the hawkish commentary and the rate hikes pushed up the US dollar which hurt gold.

In July 2022, global stock markets came under pressure, the S&P 500 fell to it lowest mark in over 18-month. Rising US interest rates and higher bond yields sparked the sell off in equities, but because the US dollar surged to a 20-year high, gold dropped to its lowest level in over one year. It seemed the dollar story superseded the risk-off move. The Fed have lifted rates by 2% in the past six months and the Fed funds futures market is pricing in another 0.75% lift next week, and judging by the commentary from US central bank, more rate hikes are in the pipeline.

The strength of the US dollar is not the only factor working against the US dollar, rising yields are a issue too. Government bonds are also popular with investors who are looking to reduce their risk, and the US 10-year yield is comfortably above the 3% mark. This applies some pressure to gold, because the metal does not pay interest or a dividend, so in some people’s eyes it is a less attractive asset. To a certain extent, gold is boxed in by the US dollar on one hand, the risk-off strategy on the other hand.

Gold has dropped to an eight-week low as higher yields and a firmer US dollar are hurting the commodity. Momentum is in negative territory, and RSI is moving lower, and this speaks to bearish sentiment. Should the downtrend continue, it might target $1,678 or $1,670. A snapback from here, could run into resistance at $1,700 or $1,707.

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