Gold prices are on edge ahead of an important Federal Reserve event
We see a variety of risks that are net bearish for the yellow metal
Traders should closely monitor movements in real 10-year yields for a sense of where gold futures may be headed
Gold got flashy Sunday night last week. In a matter of minutes, futures dropped from $1,765 to $1,678 which naturally got social media all a buzz. By Friday afternoon, however, the settle was $100 off the panicky bottom. After an interesting week of price-action on the shiny metal and in advance of Jackson Hole, we thought it was an appropriate time to review our outlook on gold.
A Confluence of Bearish Factors
Our medium-term stance remains bearish for a variety of reasons: technicals, fundamentals, sentiment & positioning, and upcoming event-risk are all headwinds. Real yields potentially ticking higher is another bearish factor that we’ll dive into later.
Price & Momentum
One of the first things we notice on gold’s long-term chart is that price paused nears its 2010-2011 peak. On itself, that is not necessarily a bad thing, but when plotted with the composite FX breadth indicator, there is clear bearish momentum across markets. The bulls need to show more broad-based excitement with a strong upward price thrust for this to change. Consensus Bulls sentiment also shows a lower high versus last summer, confirming price. For now, the old highs from a decade ago are problematic.
On valuation, while our long-term indicator is materially off the highs from a year ago, it remains decidedly in the expensive zone relative to historical pricing for gold. Moreover, gold prices have a history of staying rangebound for years on end—so it could take a very long time for valuations and sentiment to reset to attractive levels.
More near-term, ETF flow data is another area we use to gauge the market. Flows were strong last year when the commodity rose to its high just shy of $2,100 in August, but investors quickly soured. ETF flows plunged into early 2021. After a minor Q2 rebound, they have started to roll over once more. Not a good sign.
Upside Risk to Real Yields
Let’s bring up the featured chart. Like last week’s look at how the relative performance of global banks is dependent on the movement in the 10-year Treasury yield, gold has its own correlation indicator. Real yields are what matter. Gold often rises when real yields fall (and vice versa). We see material upside risk to real yields due to factors such as the economic reopening, fiscal stimulus, improving global growth, and higher nominal yields.
Featured Chart: Gold Price vs Real yields
Unconvincing Price-Action and Event Risk
Gold futures have not responded well to the recent uptick in real yields (n.b. real yields are inverted in the chart above). The risk is if there is a negative reaction by Treasury prices to the Fed meeting (higher yields), that could portend significant downside pressure on gold (as real yields would have risen). As last Sunday night demonstrated, gold futures can drop quickly as sentiment is still a slight majority consensus bullish.
We turned bearish on gold early Q4 last year and reiterate that stance today. It’s a topic we have not been shy to discuss—our 10 Charts to Watch in 2021 also gave some color on the topic.
The last year has left investors pondering questions such as, “Has Bitcoin stolen gold’s luster?” and “How has gold not rallied in this easy-money and inflationary environment over the last 52 weeks?” Those are interesting questions, but investors must remain cognizant of the multitude of factors at play.
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