Gold is one of the few commodities to trade lower year-to-date. Decline has been driven by US yields rising amid fears of a spike in inflation. Did gold lose its historical inflation-hedge feature?
Gold has been treated as a safe haven asset for years, protecting investors' wealth at times of increased risk on the markets. Precious metal has also been seen as an inflation-hedging asset. Inflation means decline in the value of money, weakening of currency and potential struggles of the economy.
Gold maintains its value over the long-term and does not react to major swings in inflation rate. Moreover, unconventional Fed actions following the Global Financial Crisis have increased the importance of bonds and triggered a potential shift in gold status as a financial asset.
Start investing today or test a free demo
Open real account TRY DEMO Download mobile app Download mobile app
We can see on the chart above that following 2009 a significant divergence surfaced between direction of inflation and gold prices. Source: Macrobond, XTB
What has caused the divergence between gold and inflation? A massive amount of money Fed has pumped into the markets via QE markets has made its way not only to the stock markets but also to the commodity markets - thanks to ETFs among others.
Correlation between gold and US yields has increased significantly over the past dozen or so years. Yields reflect expectations of interest rates. Inflation expectations show that yields may soon return towards the 2% area. In theory, such an increase in yields could trigger a downward correction as big as 10% on the gold market.
Continued increase in US yields triggered by fears of returning inflation could deepend correction on the gold market. Source: Macrobond, XTB
Technical situation
Key support for gold can be found in the $1,665 area, where 50% retracement of the March-August 2020 upward move can be found. Continued decline on the TNOTE market could lead to a break below the aforementioned support. Next support levels in line can be found at $1,690 (61.8% retracement) and $1,605 (around 10% below current price). On the other hand, key resistance levels to watch can be found at $1,800 and $1,840 (38.2% retracement). However, gold price rising to such levels would require a significant drop in US yields over the short-term. Source: xStation5
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.
