Summary:

• Gold moving towards lower bound of 1306-1366 range
• Price could be set for 4th consecutive daily decline
• Rise in US yields boosting USD and weighing on Gold

The Gold market has experienced pretty large moves in the last couple of days with 2 large declines coming after the market reversed from near the top of its recent range. Gold has been unusually quiet so far this year with the market remaining in a fairly narrow $60 range from 1306-1366. This range has actually tightened further in the past few weeks with 1322 providing support and 1355 resistance. 

 Gold has been in a narrow range of late from 1322-1355 and the market is now probing the lower bound of this range. This is within a bigger range from 1306-1366. Source: xStation

The declines of more than $20 combined in the last two sessions has come about largely due to a resurgence in the buck, with the USDIDX rising close to the 91 handle and within striking distance of its highest level of the year. The rise in the US dollar is clearly having a negative impact on the price of Gold, and these markets can be linked together by looking at the TNOTE – the 10-year US government bond which is widely seen as a proxy for interest rates. 

The theory is that a higher US interest rate is positive for the USD and therefore negative for Gold The TNOTE – which is inversely correlated to rates IE lower TNOTE = higher rates – has continued to fall lower over the past week with the yield close to 3% – its highest level in 4 years. 

If we take the US election in 2016 as a starting point we can see that both the TNOTE and Gold experienced a sharp decline on Trump’s victory (after the initial shock wore-off) before recovering throughout the first half of last year. However, around September time when the Fed announced the start of their balance sheet reduction a large divergence began. 

 The TNOTE and Gold have shown a large divergence in the past 6 months but the former may be starting to pull the latter down lower. Source: xStation

This shouldn’t be too surprising as a substantial part of the Fed’s balance sheet was TNOTEs and therefore if they reduce these holdings then the respective price will fall from less demand. However, the size of the disconnect does appear to be large and traders may look for some convergence going forward.