Gold prices dragged down by higher real yields, a strong US dollar and a breakout downside

GOLD PRICE OUTLOOK:

  • Gold prices have fully retraced the gains induced by the geopolitical turbulence of the first quarter
  • Rising real yields and strong US Dollar momentum were the two main bearish catalysts for precious metals
  • This article examines the key technical levels for XAU/USD to watch in the short term

Most read: US Dollar, Gold, S&P 500 – How Markets Reacted to US CPI

Russia’s invasion of Ukraine triggered a sharp rise in gold prices in the first quarter, pushing the metal close to her record high near $2,075 an ounce. However, the geopolitical bounty seems to have dissipated, even though the war in Eastern Europe is not over and continues to drag on almost three months after its outbreak.

Looking at the daily chart, we can see that XAU/USD has fully retraced its geopolitical turmoil-induced gains, dropping 11% from its March high to trade slightly above $1,835, a zone confluence support, where the 200-day simple moving average converges with the lower boundary of a medium-term ascending channel.

The recent pullback in commodities was caused, among other things, by the strength of the US dollar and, more importantly, by rising interest rates. For context, the DXY index, a gauge of the greenback’s strength, has jumped more than 6% since Aprilwhile the 10-year real yield (TIPS) turned positive for the first time in over two years, rising from -0.53% to 0.20%, its highest level since November 2019.

10-YEAR U.S. REAL RETURN CHART

Source: CNBC

Although gold is considered a safe haven, it hasn’t lived up to that reputation lately. In fact, in recent weeks, gold has oddly followed losses in the equity spacerather than bucking the trend in risky assets, a sign that real rate dynamics are far more important to the precious metal than investor sentiment. While real yields are expected to continue their ascent due to the Fed’s hawkish policy, XAU/USD could face further headwinds in the near term, especially if the recessionary narrative begins to fade and the traders abandon their defensive positions.

In terms of technical analysis, XAU/USD is dancing around major support near $1835/$1830 as mentioned earlier. If the bears manage to conduct price decisively below this floor, selling interest could gain momentum, paving the way for a retest of the 2022 low at $1,780. On further weakness, attention shifts lower to the December 2021 low at $1,753.

On the other hand, if the buyers regain the upper hand and trigger higher prices, initial resistance extends from $1,870 to $1,875. If this barrier is breached, we cannot rule out a move towards $1,910 followed by $1,960, although the bullish argument is somewhat weak at this point.

GOLD PRICE TECHNICAL CHART

Gold price chart

Gold Price Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX

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