Gold Price Struggles Near Two-Month Low Amid Strong USD and Rising US Bond Yields
Gold prices are facing significant selling pressure, trading near their lowest levels since mid-September. The precious metal has been caught in a bearish trend for five consecutive days, weighed down by the continued strength of the US Dollar (USD) and elevated US Treasury bond yields. Market participants remain focused on developments in the US economy, particularly the outlook for inflation and interest rates, which are contributing to gold’s ongoing struggle. In this article, we will delve into the key factors driving gold’s recent decline and explore the potential technical levels to watch as the market navigates through these turbulent conditions.
XAU/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Factors Weighing on Gold Prices
1. USD Strength and Bullish Sentiment on US Economic Growth
Gold prices are facing downward pressure primarily due to the strong performance of the US Dollar, which has reached a fresh year-to-date (YTD) high. The recent rally in the USD is fueled by optimism surrounding stronger US economic growth, particularly in the wake of US President-elect Donald Trump’s economic policies. These policies, which include tax cuts and infrastructure spending, have stoked hopes for a rebound in inflation and economic activity.
The Trump administration’s approach, which advocates for fiscal expansion and protectionist trade measures, has bolstered investor confidence in the US economy, driving up demand for the USD as a safe-haven asset. As a result, the greenback’s strength is putting considerable pressure on commodities like gold, which is priced in USD. When the USD strengthens, gold tends to become more expensive for buyers holding other currencies, leading to a reduction in demand.
2. Rising US Bond Yields: A Shift Away from Non-Yielding Assets
Another critical factor contributing to gold’s weakness is the rise in US Treasury bond yields, which has been a dominant theme in recent weeks. The yield on the 10-year US government bond has surged to its highest level in months, fueled by the expectations that the Federal Reserve (Fed) will proceed cautiously with its interest rate cuts. The elevated yields make Treasury bonds more attractive relative to non-yielding assets like gold. As bond yields rise, investors are incentivized to shift their capital into higher-yielding US debt instruments, further undermining gold’s appeal.
3. US CPI Data Reinforces Hawkish Fed Expectations
The release of the US Consumer Price Index (CPI) report for October has added fuel to the bearish sentiment surrounding gold. The CPI rose by 0.2% month-over-month and by 2.6% on a year-over-year basis, while the core CPI, excluding food and energy, increased by 0.3% in October. This data suggests that inflationary pressures remain persistent, which could lead to fewer rate cuts from the Fed in the near future.
Market participants now anticipate a third interest rate cut in December, but the path for future cuts remains uncertain. With inflation still relatively elevated, particularly in the core metrics, the Fed may adopt a more cautious stance going forward. Fed officials, including Dallas Fed President Lorie Logan and St. Louis Fed President Alberto Musalem, have emphasized the need for caution in further easing, especially with inflationary pressures not yet fully under control.
Trump’s Economic Policies and Inflation Concerns
1. The Trump Trade: A Renewed Focus on Fiscal Expansion
The optimism surrounding Donald Trump’s presidency and his economic policies, commonly referred to as the “Trump trade,” continues to shape market sentiment. While his policies are seen as potentially boosting economic growth through tax cuts and trade protectionism, they also carry the risk of accelerating inflation. This poses a challenge for the Federal Reserve, which may find itself constrained in its ability to ease rates further without stoking more inflationary pressures.
The market’s focus on fiscal expansion, coupled with rising inflation expectations, is driving up bond yields and supporting the USD. As a result, gold has struggled to gain momentum, as investors shift towards riskier assets with higher yields.
2. Inflationary Risks and the Fed’s Dilemma
Rising inflation expectations, partly driven by Trump’s proposed tax cuts and tariffs, make it harder for the Fed to maintain an accommodative monetary policy. While some Federal Reserve officials have indicated that inflation has made significant progress toward its target, others are wary of the persistence of “sticky” inflation. This divergence in views among Fed members suggests that the central bank may be more reluctant to continue cutting rates, which undermines one of the primary drivers for gold’s appeal as a non-yielding asset.
Gold’s Technical Outlook: Key Levels to Watch
1. Breakdown Below $2,600 Signals Further Downside
From a technical perspective, gold’s recent price action indicates a bearish trend. The overnight breakdown below the $2,600 level, which coincided with the 38.2% Fibonacci retracement level of the June-October rally, has triggered fresh selling. This breakdown suggests that gold’s path of least resistance is to the downside, and traders may now be eyeing a potential decline toward the next key support levels.
The $2,542-$2,538 region is a critical area to watch, as it represents the confluence of the 100-day Simple Moving Average (SMA) and the 50% Fibonacci retracement level. If this support zone is breached, gold prices could extend the pullback from the all-time high and test the psychological $2,500 mark. A break below $2,500 would open the door for a deeper correction, potentially toward the next significant support levels.
2. Resistance Levels: $2,580 and $2,600
On the upside, any attempts at recovery may face significant resistance near the $2,580 area, which was the high during the Asian session. A move above this level could bring the $2,600 round figure back into focus. A sustained rally beyond $2,600 would be required to trigger a short-covering rally, which could push gold toward the $2,630-$2,632 region. If gold manages to break through this resistance zone, it could pave the way for a move toward the next relevant hurdle at the $2,660 level.
Key Events to Watch
Traders will be closely watching the upcoming US economic releases, including the Weekly Initial Jobless Claims and the Producer Price Index (PPI). However, the main event for market participants will be the speech by Federal Reserve Chair Jerome Powell later in the day. Powell’s comments on the Fed’s outlook for inflation and interest rates could provide further clues on the central bank’s next moves, influencing both the USD and gold.
Bearish Bias Remains for Gold
In summary, gold prices are under significant pressure due to the strength of the USD, rising US Treasury bond yields, and persistent inflation concerns. The continued optimism surrounding US economic growth, coupled with the potential challenges to further rate cuts from the Fed, has shifted investor sentiment away from non-yielding assets like gold. While technical indicators suggest the potential for a further decline toward key support levels, any recovery in gold prices will need to overcome substantial resistance levels. As market participants await further clues from the US economic data and Powell’s speech, the outlook for gold remains skewed to the downside in the short term.
