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Gold Price Remains Vulnerable as US Treasury Yields Continue to Fall

Gold Price Remains Vulnerable as US Treasury Yields Continue to Fall

David Song, Strategist

Gold Price Talking Points

The price of gold trades to a fresh weekly low ($1878) ahead of the Federal Reserve’s first interest rate decision for 2021, and the precious metal may continue to give back the rebound from the monthly low ($1803) as long as the weakness in longer-dated US Treasury yields persists.

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Gold Price Remains Vulnerable as US Treasury Yields Continue to Fall

The price of gold trades below the 50-Day SMA ($1857) again even though the Federal Open Market Committee (FOMC) is expected to retain the current course for monetary policy, and the V-shape recovery from theNovember low ($1765) may continue to unravel as the low interest rate environment along with the ballooning central bank balance sheets no longer provides a backstop for the precious metal.

It remains to be seen if the FOMC will alter the forward guidance in 2021 as the committee pledges to support the US economy “until substantial further progress has been made toward reaching the Committee's maximum employment and price stability goals, and more of the same from Chairman Jerome Powell and Co. may keep current market themes in place as the central bank appears to be in no rush to scale back its emergency measures.

In turn, the price of gold may continue to move to the beat of its own drum as it no longer exhibits the bullish price action from 2020, but the US Dollar may continue to reflect an inverse relationship with investor confidence as long as the FOMC remains on track to increase its “holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”

With that said, the FOMC interest rate decision may do little to prop up gold prices as the ongoing expansion in the Fed’s balance bolsters investor confidence, and the precious metal may continue to give back the rebound from the monthly low ($1803) as the Relative Strength Index (RSI) no longer tracks the upward trend carried over from the previous month.

Gold Price Daily Chart

Image of Gold price daily chart

Source: Trading View

  • Keep in mind, the price of gold pushed to fresh yearly highs throughout the first half 2020, with the bullish price action also taking shape in August as the precious metal tagged a new record high ($2075).
  • However, the bullish behavior failed to materialize in September as the price of gold traded below the 50-Day SMA ($1857) for the first time since June, with developments in the Relative Strength Index (RSI) negating the wedge/triangle formation established in August as the oscillator slipped to its lowest level since March.
  • The correction from the record high ($2075) indicates a potential shift in market behavior rather than an exhaustion in the bullish trend as the price of gold continues to trade at its lowest level since July, with the RSI highlighting a similar dynamic in late-2020 as it dipped into oversold territory for the first time since 2018.
  • In turn, the V-shape recoverythat materialized ahead of the July low ($1758) may continue to unravel following the string of failed attempts to hold above the 50-Day SMA ($1857), with the RSI highlighting a similar dynamic as it no longer tracks the upward trend carried over from December.
  • A break/close below the $1837 (38.2% retracement) region may push the price of gold towards the Fibonacci overlap around $1816 (61.8% expansion) to $1822 (50% expansion), with the next area of interest coming in around $1786 (38.2% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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