Gold stuck between a rock and a hard place ahead of US CPI

Gold has been undermined by rising government bond yields owing to major central banks generally turning more hawkish while the still-buoyant equity markets means there has been reduced demand for the perceived safe haven asset. Thus, for the time being, the impact of the weaker US dollar is not having any meaningful impact on the buck-denominated precious metal. Apparently, investors continue to find value in equities even at these elevated levels and are overlooking gold, an asset which pays no interest or dividend and costs money to store.

The dollar weakness has been taking turns throughout this year as global central banks started to drop their dovish policy biases one by one. After a sharp rally at the end of last year, the dollar first started falling against its major European rivals – most notably the euro – and this theme continued throughout the first half of the year and beyond. Then the Canadian dollar surged, causing the USD/CAD to break down as the Bank of Canada became the first major central bank to follow the footsteps of the Federal Reserve in hiking interest rates after several years of extraordinary loose monetary policy. Now it is apparently the Australian dollar's turn to turn up the heat with the AUD/USD threatening to break that key 0.7750 hurdle where it had found strong resistance in the past.

As far as gold is concerned, it has had its moments of strength as the dollar sold off, but investors’ insatiable appetite for risk means gold has not really taken full advantage of the soft greenback. With gold unable to materialise on a weaker dollar, could you imagine what might happen when and if the dollar does bottom out? There is a possibility that the greenback may have a better second half given the Fed's plans to raise interest rates further and reduce its balance sheet, though this outcome appears to be mostly priced in. So there’s a great deal of uncertainty in this regard.

In the immediate term, today's release of US CPI and retail sales are additional risks to consider for dollar pairs, and in turn gold. If today’s US data causes the dollar to go up then gold could fall once again. But in the event of further dollar weakness, gold could strengthen a little in the short-term. I think gold will generally remain out of favour for as long as the appetite for risk remains intact. Only when equity markets start to breakdown is gold likely to make a strong comeback. So, it is not all about the dollar when it comes to gold.

From a technical perspective, gold made a lower low when it broke down below $1215 last Friday as a result of a stronger US jobs report. However, there hasn’t been much follow-through to the downside since that breakdown, which makes me wonder if gold will be able to hang around these levels until such a time when equities start to meltdown. That being said, gold hasn’t broken any major resistance levels yet. I will only drop my bearish view when gold creates a short-term higher high above the most recent swing point at $1229. Until and unless that happens, any bullish signs – including that doji candle from Monday – should be taken with a pinch of salt. Indeed, the downward sloping 50- and 200-day moving averages objectively telling us that the trend is currently bearish.