Gold Prices Break Down as the Dollar Continues to Break Out

Key Insights

• Gold prices dropped sharply.
• The dollar broke out to new highs.
• Treasury yields were lower.

Gold prices moved and broke down as the dollar surged. Despite a decline in Treasury yields on Monday, the dollar continued to gain traction as the yield differential moved in favor of the greenback. Since gold is quoted in dollars, a strong dollar generally weighs gold prices.

The Fed is signaling a double-barrelled process that has pushed yields to very aggressive levels to fight inflation. The market is pricing in two 50-basis point tightenings, a 75-basis point tightening, and two 25-basis point rate hikes in the next 5-meetings. This accelerating interest rate is geared toward reducing demand and increasing the unemployment rate, which might halt inflation.

The Fed is also going from 95-billion to zero in 3-months. The reduction in their balance sheet will add to the decrease in liquidity and further tightening rates.

Technical Analysis

Gold prices dropped sharply on Monday. Prices sliced through support near the 50-day moving average, now resistance near 1,936. Support is seen near the April lows at 1,890.

Short-term momentum has turned negative as the Fast Stochastic generated a crossover sell signal. Prices are oversold as the fast stochastic prints a reading of 3, below the oversold trigger level of 20.

Medium-term momentum has turned negative as the MACD generates a crossover sell signal. This occurs as the 12-day moving average minus the 26-day moving average crosses below the 9-day moving average of the MACD line. The  MACD (moving average convergence divergence) histogram has a negative trajectory that points to lower prices and accelerates negative momentum.