FX.co ★ Gold turns negative as dollar strengthens and US debt rates rally

When the Fed begins to normalize monetary policy, hard times come for gold. This was the case in 2013-2015 when the precious metal fell below $1,050 per ounce. So, most likely, this will be the case now. This is due to the strengthening of the dollar and the rise in the yield of US Treasury bonds, which are constant companions of the Fed's monetary restriction.

Non-interest bearing gold invariably finds itself in mourning as US debt rates rally. A week ago, the yield on 10-year US bonds was 20 bp lower than now. At the same time, inflation expectations remained practically unchanged, which led to an increase in real profitability. Bad news for the XAU/USD bulls.

Dynamics of gold and US Treasury bond yields

The growth in borrowing costs is facilitated by both expectations of the start of QE tapering by $120 billion a month in November, and fears that excessively high prices in the US economy are serious and for a long time. The latest FOMC forecasts have raised PCE estimates from 3% to 3.7% in 2021 and from 2.1% to 2.3% in 2022. In addition, Fed Chair Jerome Powell, speaking before Congress, said that high inflationary pressure is likely to persist for some time. Its reasons are strong demand and supply bottlenecks. These effects turned out to be more significant and lasting than the central bank expected.

The longer prices remain at abnormally high levels, the more chances that the Fed will decide to aggressively tighten monetary policy. According to St. Louis Fed President James Bullard, this scenario would require two federal funds rate hikes in 2022. This would create a tailwind for the dollar and US Treasury yields and a headwind for gold. It is not for nothing that the fans of the precious metal, having felt the smell of fried, began to actively take money from the ETF. As a result, the stocks of specialized exchange-traded funds dropped by 4.5 tons.

The rise in the US Treasury bond rates is also facilitated by the statement of Treasury Secretary Janet Yellen that Congress should not break the deadlock on the issue of the government debt ceiling on the falling flag. On October 18, the Treasury will run out of money and will not be able to fulfill its obligations. Default will be a shock to financial markets that they have never experienced before. There is no need to count on the Fed or anyone else to save investors and the entire economy. It is better not to bring the public debt ceiling farce to the point of absurdity.

Thus, gold fell under a double blow. On the one hand, expectations of a normalization of monetary policy, fears of inflation, and default contribute to the growth of Treasury bond yields. On the other hand, the US dollar is strengthening as a safe-haven currency. In such an unfavorable environment, the risks of continuing the peak of XAU/USD are very high.

Technically, a breakdown of the supports located at the pivot points $1,735 and $1,720 is fraught with the continuation of the downside hike in the direction of the target by 161.8% according to the AB=CD pattern. We keep the shorts formed from $1,782 and $1,776 and build them up on pullbacks.

Gold, Daily chart