Textbook Position-Squaring on Dollar Dip

Today’s early reaction is just textbook position-squaring in reaction to a dip in the dollar and easing 10-year Treasury yields. Both are increasing the appeal of non-yielding bullion.

Why Gold Has Been Under Pressure Since February 28

The relationship between yields, the dollar and gold is interesting, but the major story driving the price action in gold at this time is crude oil. Here’s why gold has been under pressure since the war between the U.S. and Iran started on February 28.

Higher crude oil prices could push inflation higher and this will likely make the Federal Reserve more cautious about cutting interest rates. If they continue to push the rate cuts into the future then this could keep real yields elevated. A dovish outlook from the Fed is one of the main reasons gold has been so strong over the past two years. Elevated yields could become a major headwind for gold if crude oil continues to climb.

$100 Oil Is the Key Level for Gold Traders

In my opinion, the key level to watch for crude oil is $100. Brent oil is currently above this level, WTI is getting close to overcoming this price. A sustained move over this level will be bearish for gold. It’s important to note that fundamentally, we’re not just dealing with ending the war, but also keeping supply moving through the Strait of Hormuz and repairing the damaged infrastructure.

Gold as an Inflation Hedge — Not So Textbook This Time

Some will argue that gold is a hedge against inflation, but this case is a little different and not so textbook because of the relatively high interest rates, which make yielding assets like Treasurys more attractive to investors. Now we don’t expect to see a change in the longer-term trend, but on a day-to-day basis, gold will struggle to gain traction until it reaches a key value area or until inflation subsides enough for the Fed to comfortably resume its rate-cutting plans.

Short-Term Trend Turns Down but 50-Day MA Holds