Gold: There Is Still a Path to $1,800 if U.S. Dollar, Bond Yields Do This…

A week ago, we wrote about where the dollar and bond yields need to go in order for gold to eventually breach $1,800 an ounce. We’re pleased to report that several technical calls we made came through and we’ll list them here.

But more important than that, of course, is what needs to happen with the US currency and Treasuries next to achieve our target for the gold rally.

As I’ve said previously, the phrase "one cannot exist without the other" is most applicable for gold in the context of its directional relationship with the dollar and bonds. Simply put, in order for the yellow metal to continue rising in value, at least one of the other two has to drop in value.

Gold, the dollar and yields have been acting in concert, particularly of late, amid expectations that the Federal Reserve would likely execute a rate hike of 50 basis points (bp) on Dec. 14 versus four previous increases of 75 bp each—achieving a so-called pivot in rates. 

The Fed’s likely change in tack comes amid a steady easing in inflationary pressure via falling consumer and producer prices. The central bank is to release the minutes of its November policy meeting at 14:00 ET (19:00 GMT) today, in what could be an affirmation of its intention for a pivot.

Gold futures for December delivery on the New York Mercantile Exchange’s COMEX division were at $1,735.15 an ounce by 00:40 ET (05:40 GMT), down 1% on the week after a similar decline the week before.

The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, has weakened again since Monday, losing a modest 0.1% from the start of this week, after gaining 0.6% last week. By Wednesday noon in Asia, the index hovered at just under 107.

Treasury yields, benchmarked to the US 10-year note, was at 3.758, down 2% on the week after gaining 0.5% in the week prior.

“With the Dollar Index and bond yields being key drivers for gold, we’re in a peculiar situation where all three are declining,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“In a situation like this, it’s important to watch closely which one of the three blinks, reversing first.”

Dixit noted that the Dollar Index rebounded from the 105.15 support and tested 107.89 last week, as per the projection called by Investing.com.

He added:

“Hereon, DX weakness below 107 may work its way down towards 106.15 and retest swing low 105.15 followed by 104.50.”

“This bearish continuation of the Dollar Index may further strengthen gold's rebound towards $1,800-$1,830-$1,850.”

In the case of bond yields, the drop below 3.85%, as called by Investing.com, continues to be a support base for gold too.

“Like the Dollar Index, a break below 3.67 and 3.50 on bond yields will help gold rise above its recent $1,786 high, setting up a move towards $1,800-$1,830-$1,850.”

With gold itself, charts point to a continuous uptick in the near term even if an ounce fell below $1,730, Dixit said, adding:  

“The next levels of $1,721-$1,711-$1,701 would be points of interest in gold.”

“A $1,786-$1,732 correction in gold, which constitutes a $54 drop, and even a drop to $1,721, which would be a $65 drop from the peak, may not alter the rebound seen on gold’s monthly chart.”

But all things said, gold's rebound to $1,800 and $1,850 will need clear signals from the Dollar Index dropping to 104.50 and 10-year yields dropping to 3.5 and 3.2, Dixit added.

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.