Gold News: XAUUSD Breaks Bear Market Line as Dollar and Yields Firm

Spot Gold Drops to Two-Month Low as Yields and Dollar Take Control

Spot Gold (XAUUSD) fell roughly 1.3% to around $4,447 an ounce Wednesday and hit its lowest level in two months. The geopolitical bid that had been holding under prices started coming out after Iranian state television reported a possible framework deal with the United States that could restore Strait of Hormuz shipping to pre-war levels within a month. That took part of the fear premium out of gold. But the selling did not stop there. Treasury yields moved higher, the U.S. Dollar Index strengthened, and the inflation story that has been building underneath this market for weeks took over as the primary driver.

The Inflation Damage Is Already Done

The Iran conflict pushed Spot Brent crude oil sharply higher over the past several weeks and that created a problem that does not go away just because the headlines improve. Higher energy prices feed directly into transportation costs, manufacturing input prices, and eventually consumer prices. That inflation is already working through the system. Even if oil drops further on peace talks the damage to the inflation picture has already landed.

That is the chain that is running gold right now. Months of elevated crude oil prices pushed inflation expectations higher. Higher inflation expectations pushed the Federal Reserve further away from cutting rates. Current market pricing points toward expectations for a 25-basis-point rate hike by year-end.

Spot Gold (XAUUSD) does not generate income. It does not pay interest. It does not pay dividends. When rates go up the opportunity cost of holding gold goes up with it and money moves into assets that actually pay something. That is exactly what happened Wednesday.

Yields and Dollar Lined Up Against Gold at the Same Time

The 10-year U.S. Treasury yield rebounded on the session and gave investors a more attractive alternative to non-yielding assets. Rising yields pull money out of gold consistently and the pressure showed up immediately in the price action Wednesday.

The U.S. Dollar Index strengthened at the same time which made Spot Gold (XAUUSD) more expensive for foreign buyers. When yields and the dollar move higher together it creates a squeeze on gold from both sides and that combination is difficult to fight.

Minneapolis Federal Reserve President Neel Kashkari added to the pressure. He said the Fed needs to stay focused on inflation risks that appear to be building even though it is too early to predict when policy changes might happen. The message was clear enough. The Fed is watching inflation closely and traders should not expect relief anytime soon.

The Geopolitical Premium Was Never the Real Story

Gold had been getting credit for weeks as a beneficiary of rising tensions around the Iran conflict. Money moved into gold as the situation escalated and prices held elevated levels on the assumption that geopolitical risk would keep demand strong. Wednesday’s framework report gave traders a reason to rethink how much of that premium was justified.

Spot Gold (XAUUSD) bounced briefly after the initial headlines but the recovery did not hold. Traders sold the bounce because the underlying fundamentals had already shifted against gold before the geopolitical headlines even changed.

The real driver was never the war premium. It was the rate picture. War escalation pushed oil higher. Higher oil pushed inflation higher. Higher inflation kept the Federal Reserve locked in place. That chain has been running against Spot Gold (XAUUSD) for weeks and the easing of geopolitical tensions just removed the last thing that was masking it.

Daily Spot Gold (XAUUSD) Technical Analysis

Spot gold fell sharply on Wednesday after breaking key support at $4481.78, putting it in bear market territory. The trend is down according to the daily swing chart and a new swing top was formed at $4580.21.

At this time, three elements are the key to the next major move. On the upside, the first key is the 50-day moving average at $4637.03. It’s not only resistance, but also a potential trigger point for an acceleration to the upside.

On the downside, it’s the 200-day moving average that traders will be watching. It is potential support and a potential trigger point for an acceleration to the downside.

In between the moving average levels is $4481.78. The line that separates the Bull Market from the Bear Market.

The way of least resistance is down. The daily chart pattern indicates that a sustained move under the 200-day MA at $4388.46 could lead to a steep drop into the March 23 bottom at $4099.12. A breakout over the 50-day MA will signal the presence of buyers, but the next rally is likely to be labored with potential resistance targets at $4744.34, $4850.68 and $5028.04.

With the 50-day MA retreating and the 200-day MA sliding up, the moving averages are compressing. This means a major breakout is coming. Traders should brace for heightened volatility.

What to Watch

The Personal Consumption Expenditures data is the next catalyst for Spot Gold (XAUUSD). That is the Federal Reserve’s preferred inflation measure and if it comes in hot the rate hike expectations that are already pressuring gold get stronger. A cooler number could slow the selling but it would take a significant miss to change the direction of the trade at this point. The inflation damage from months of elevated crude oil is already in the system and one report is not going to reverse that.

The 200-day moving average is the key level on the downside. A sustained break under it opens the door to $4099.12 and that is a long way down from here. On the upside $4481.78 is the line between the bull market and the bear market. Until Spot Gold (XAUUSD) reclaims that level the path of least resistance stays lower and rallies are selling opportunities.

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