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Why the rally in gold withered and what comes next?

November 24, 2021 7:33 AM

The reason for the repricing is that the market believes Fed Chair Powel will begin raising rates sooner than if Brainard had been nominated for the Chair.

Following this, the U.S interest rate market is now fully priced for “lift-off” in June 2022, with three rate hikes in total priced by the end of 2022.

Earlier rate hikes dampen inflation expectations. With front-end yields supported and inflation expectations falling, real yields (the interest rate adjusted for inflation) have moved higher from deeply negative levels.

After closing at -117bp two weeks ago, U.S 10 year real yields closed overnight at -95bp. While U.S. 30 year real yields closed at -36bp after closing at -57bp two weeks ago.

In essence, the repricing in real yields that has also boosted the U.S. dollar undermined the rally in gold.

How much further gold falls in the short term depends on the FOMC meeting minutes and, more importantly, Core PCE inflation.

Technically the decline from the $1877 high below the $1835 breakout level leaves the rally from the August $1677 low with a distinctly corrective appearance. It warns of the potential to test uptrend support in the $1760/50 area, with scope towards the $1677 triple low.

As such, the preference is to sell a corrective bounce in gold back towards $1810/20 resistance zone, aware that it would take a break back above medium term resistance at $1835/40 to negate the bearish shadow that now overhangs the gold market.

Source Tradingview. The figures stated areas of November 24th, 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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