These 4 Drivers Are Not Helping Gold Right Now – ANG Traders
(Kitco News) – Gold tends to follow four correlated markets and right now, these drivers look to be limiting the yellow metal’s advance, say analysts from ANG Traders.
In a recent report, the analysts compared gold to the U.S. dollar index (DXY), inflation data, treasury yields and the USD/JPY currency pair to make their assessment.
“Gold is a follower, not a leader. Gold goes where the four much larger markets tell it to,” they wrote.
For one, the current correlation between gold and the U.S. dollar index would suggest a lower metal price.
“There are short-lived periods during which the relationship spikes toward the positive which subsequently result in lower gold prices,” they said. “We are in one of these situations at the moment. Gold can continue to rise from here, but this gives us reason to question gold’s upside potential.”
However, they admitted that the outlook’s “Achilles’ heel” lies at the 92 level on the DXY. “If the dollar cannot hold the 92 level, and gold breaks $1,310, then gold will be in a bull market.”
Gold prices have pushed higher, nearly hitting a two-month high this week. At the same time, the DXY is trying to bounce back from the 13-month low it hit mid-week. December Comex gold futures last traded at $1,275.50 an ounce while the DXY last stood at 92.73.
As for the second driver, the analysts noted that at the moment, gold would not be helped by any moves in inflation, whether up or down.
“The way we see it, if inflation starts to rise, the Fed will raise rates faster than the market is predicting, which will cool inflation, raise the dollar, and put pressure on gold,” they said. “If inflation drops, TIP [inflation-adjusted treasuries exchange-traded fund] will drop and put pressure on gold. Neither scenario is bullish for gold in the medium-term.”
Looking at treasury yields, the analysts said the two-year rate, which is most susceptible to upward moves when the Federal Reserve normalizes rates, has the highest negative correlation with gold prices right now.
“Even though the perceived speed at which the Fed is expected to normalize interest rates has slowed down, the bias is still up and this should limit gold’s upside,” they said.
The U.S. two-year bond yield currently lies at 1.335%, down 2.4 basis points on the day.
The final driver – the USD/JPY – has a “very strong” negative correlation to gold prices, the analysts said, adding that the current price action in the major currency cross rate would suggest downside for the metal.
“The currency pair is in an uptrend as long as it does not break support at the Fibonacci 50% retrace (108). As long as the 108 level holds, gold’s upside will be limited,” they said.
The USD/JPY last stood at around 110.131, down 0.51% on the day.
By Sarah Benali