The gold market is under some moderate pressure in early action Wednesday as rising treasury bond yields take their toll. Not helping gold at all is the fact that the dollar is also staging a mid-week rebound. Higher bond yields have been a major issue for financial markets in the last few months. With the benchmark 10-Year Note above the 3% yield level, it is difficult to say just how high yields could go before running out of gas. The higher they go, however, the lower gold may end up going.
The yellow metal is currently being hit on all sides by the combination of rising yields, an increasingly hawkish Fed and geopolitical issues. Despite these factors, it may prove challenging for the bears to keep gold down and the market could be vulnerable to a sharp rebound at any time. Despite the Fed and its plans for much higher interest rates, the gold market will also focus on the reason for those higher rates-something called inflation.
Inflation remains near a 40-year high. Although some recent data may suggest that inflation has peaked already, the core rate of inflation is likely to remain elevated throughout the course of the year. As price pressures take an even larger bite out of household incomes, an increasing number of investors may look to gold to shield their capital and protect their purchasing power in the months ahead. The demand for gold as an inflation hedge could keep prices from falling much further while also providing some gunpowder for an eventual rally higher. If or when such a rally develops depends on several factors. An end to the war in Ukraine, for example, could be viewed as being bearish for gold and could add additional pressure to the market. A new twist in the war, however, could send the price of gold skyrocketing higher in rapid fashion.
Much like the bears, the bulls have thus far shown an ineptitude to rallying prices and sustaining those gains. The sustainability of any rally in gold in the months ahead may be hugely important. Another run higher followed by another failure to maintain or extend could shift market dynamics as many bulls could tire quickly and throw in the towel. The market has already attempted to move higher and failed several times. One more time could set the stage for an extended period of weakness. With such weakness comes opportunity, however, as long-term investors may be able to purchase gold “on sale.”
The bears are now in control on the daily chart and will look to produce a close below key support at $1800. The bulls will look to rally prices higher again and produce a close above $1850 and then $1900. A move either above or below these key levels may set the trend for gold prices for the months ahead. Although the bears have shown strong control in recent weeks, the market remains vulnerable to a swift and significant short covering rally that could help the bulls level the playing field.