Gold weathers violent rates move ahead of US CPI

• Gold holds firm despite extreme front-end Treasury repricing
• Ten-day correlation with US two-year yields reaches -0.81
• $4,283 remains the key downside level ahead of CPI
• Crude oil adds another wildcard after its recent surge

Given the scale of the rout in global bond markets and rebound in the US dollar, gold has held up remarkably well, even if it hasn’t been immune to those macro headwinds. Whether that resilience can persist may be determined by the US inflation report due later Friday, along with gyrations in the crude oil price.

Gold’s traditional relationships back in play

There has been a long-established relationship between gold and movements in bond yields and the US dollar. Some periods have seen that relationship run very strongly, others less so, but over the past fortnight it has been fairly consistent. Gold’s 10-day correlation with US two-year yields has strengthened to around -0.81, while its relationship with DXY sits near -0.68. So directionally, gold is behaving pretty much as you would expect given the circumstances.

However, the magnitude of the response has been anything but ordinary, with bullion hanging tough despite an extraordinary lift in US yields over the past fortnight.

Rates shock builds across the curve

Source: LSEG

On September 10 alone, two-year Treasury yields jumped 12.3bp, with five-year yields up 12bp and 10-year yields rising 10.7bp. Since 2010, the move in twos sits around the 99th percentile of daily observations, while the moves in fives and tens were also among the largest seen over that period.

Source: LSEG

That acceleration is only part of a broader move that has been equally large in scale. Since September 3, two-year yields have risen 21.6bp and five-year yields 22.4bp, while from August 26 the increases swell to 32.6bp and 35.2bp respectively. Both moves sit around the 98th percentile of comparable observations since 2010.

So while not unprecedented, moves of this magnitude remain rare by modern standards.

Gold retests familiar support zone

Source: TradingView

The price remains in a firm downtrend from the highs set in late August, with the latest pullback taking it beneath the 23.6% Fib retracement of January to June bear move. As annotated on the chart, the area between that level and the recent low of $4,283 has repeatedly absorbed selling since the start of August, making it the key zone to watch heading into the release of US CPI for August later in the session.

Given the prevailing downtrend and coiling price action, the technical setup suggests the risk of an eventual downside break may be growing, although confirmation from price action will be required. RSI (14) sits just above oversold territory and has set a lower low, indicating downside momentum is building again. MACD sends a similar message, having staged a bearish crossover and begun to diverge from its signal line in negative territory. A clean break beneath $4,283, particularly if followed by a backtest and rejection of the level from below, would bring $4,220 into view initially, followed by $4,165.

Above the 23.6% Fib, $4,367 remains a level of note, having acted as both support and resistance on several occasions over the past six weeks, before the August downtrend comes into view. A break above that trendline would put the $4,440-$4,450 zone on the radar for bulls.

On the daily chart, the 100-day moving average also sits close to the 23.6% Fibonacci level, adding to the importance of the zone, while the 50-day moving average sits around $4,268. The 200-day moving average is considerably higher at $4,538, providing another reference point should the price stage a more meaningful recovery.

Inflation, energy risks take centre stage

With the US inflation report due early in the North American session, the initial focus is likely to be on how the data shifts expectations for next week’s Fed decision. A stronger-than-expected print that lifts pricing for a rate increase beyond its current level of around 70% would likely push front-end yields higher and bolster the US dollar. Based on past and current relationships, such a backdrop would add to downside risk for bullion, increasing the risk of a break beneath $4,283. The opposite applies if we get a softer reading that sees pricing for a hike retreat.

The other wild card is crude oil. After such a pronounced surge over the past couple of weeks, the risk of some form of retracement is clearly there. Separate to the CPI report, a sizeable decline in crude may also provide some breathing space for gold.