Why the sharp fall this week?

Gold has been touted as an inflation hedge and as a stagflationary play which are two major influences in markets. So, if you just considered those two factors you may be asking yourself, why is gold not roaring higher? Earlier this week gold took out a key reversal area and invalidated a decent technical reversal signal.

What’s pressuring gold lower?

The reason for gold remaining pressured lower is due to the interplay between real yields and the USD. Now, many traders know that strength in the USD is a headwind for gold. This provides part of the reason for gold’s weakness. The USD index surged above 106 in a surprise move after the US returned from the July 04 holiday. This was a key driver for gold’s move lower. On top of this real yields are still elevated. It is a strong USD and relatively elevated real yields which are keeping gold prices pressured. Look at the chart below (gold is in yellow, TIPS is in blue, and DXY is in purple).

What needs to change for gold to gain again?

What gold buyers are looking for is an environment where real yields and the USD are both falling. When this happens gold tends to gain. This is a helpful summary:

  • Rising real yields and rising USD = gold pressured,
  • Falling real yields and falling USD = gold upside.

As long as this dynamic between yields, inflation, and the USD remains then gold traders should pay careful attention to it in reference to where future gold prices might go.