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.
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
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