Will rising delta cases help drive gold higher or could tapering and rising yields cause a wider reversal?
Tapering talk and the risk of rising treasury yields could spark another gold slump, but will rising Delta cases help spark another leg higher?
Powell helps provide a somewhat cautious tone
Gold has been regaining ground over the past two weeks, with Federal Reserve (Fed) chair Jerome Powell’s Jackson Hole appearance easing fears around the forthcoming monetary tightening phase. While the Federal Open Market Committee (FOMC) does remain convinced that they will likely need to begin tapering this year, Powell has highlighted the need to continue the economic recovery seen in recent months. The rising number of Delta cases in the US could provide downward pressure on the economic rebound, which in turn could provide some form of delay to the tapering process. Nonetheless, any short-term delay would likely provide merely a brief period of respite from what looks like a relatively nailed on move to lower the rate of asset purchases.
Would tapering cause gold weakness or is it simply a rate hike that counts?
Gold is often an asset of choice at times when markets view the dollar as being devalued. In general that will be at moments of currency creation rather than simply an environment of low rates. Looking back to the 2013 ‘taper tantrum’, we clearly saw the price of gold top out prior to actually seeing asset purchases halt. However, as we can see below, the notion of impending tapering does not always result in a decline for gold. Much of the post-2008 period saw asset purchase programmes come and go, with the decline in gold only coming once we saw the Fed telegraph plans to wind down third quantitative easing (QE3).
Another key area to focus in on is the treasury market, with the US 10-year yield moving in inverse to the price of gold. By reversing the value of the 1-year, we can see a close relationship between both markets. One thing that is notable is the long-term downtrend in treasury yields does highlight the potential for further gold strength.
However, it is notable that the rise in yields seen in the final months of 2020 sparked a period of weakness for gold. That means that further upside for yields would likely bring weakness for gold. Yields are expected to rise when the economy improves and fears subside. Whether that is forthcoming given concerns over the delta variant remains to be seen. However, it is going to be crucial to keep an eye out for yields as a determinant of demand for precious metals.
Gold consolidating or topping out?
With the 10-year yield starting to regain ground and the Fed planning to taper, there is certainly a risk for gold. The chart below does highlight how we could be looking at a potential repeat of the topping pattern seen in 2013.
However, it would make more sense to look for a breakdown below the 61.8% Fibonacci support level and recent lows of $1677. Such a move would bring greater confidence of another strong down move for gold. To the upside, a break through $1916 brings expectations of another bullish breakout phase for gold.
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