Plunging U.S. Dollar, Bond Yields and $1,850 Gold: How It Could Happen

Heard of the phrase 'one cannot exist without the other?' Well, that's for your gold rally versus US dollar/bond selloff. In order for the yellow metal to continue rising in value, at least one of the other two has to drop.

It wasn't always like that, of course.

Two decades ago, a major geopolitical event such as the Ukraine invasion or the Middle East conflict would have been enough for gold prices to take off on their own. That used to be the so-called 'safe-haven play' in gold.

Alas, today's macro trade no longer allows bullion such exclusivity. Case in point: Tuesday's spike in gold brought New York-traded COMEX futures to just $10 short of $1,800 an ounce amid speculation that Russian rockets meant for Ukraine may have misfired into Poland, killing two people. At a glance, it looked much like the yellow metal was acting as a hedge to a major geopolitical event.

But a look at the dollar's chart would also show the currency not far from the three-month lows it plumbed earlier in the day, despite it gaining ground against the euro on the back of the missile incident—which itself was a bullish event for the dollar, given the negative implications for Europe and its single currency.

Thus as bets grow now for gold to reach $1,850 soon from the upward momentum it has garnered lately, it would make sense to postulate as well where the dollar and US Treasury yields ought to be in order for that to happen.

The three are acting in concert on the basis that the Federal Reserve would likely execute a rate hike of 50 basis points (bp) on Dec. 13 versus four previous increases of 75 bp each—achieving a so-called pivot in rates—amid a steady easing in inflationary pressure via falling consumer and producer prices.

Gold Daily

Charts by SKCharting.com, with data powered by Investing.com

As gold asserts its bullish resolve now in defiance of its bearish streak in seven previous months, the path for $1,800 and $1,850 looks increasingly possible but with attendant volatility should the November US jobs report—due on Dec. 2—turn out to be stronger-than-expected, complicating the Fed's intentions for a rate pivot.

Gold Weekly

Should the Fed go ahead with a 50 bp hike in December, gold could still have a $30-50 appreciation, but another 75 bp increase will most likely trigger a correction that drives it back toward $1,750 or even $1,730 before it regains support for a rise, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. Adding:

"While a 50-bp Fed hike for December is baked into the cake, so to speak, much of gold's real move will depend on how the dollar and Treasuries continue to behave over the next few weeks."

Dollar Index Weekly

At 02:30 ET (07:30 GMT) on Wednesday, the Dollar Index Futures, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc, hovered at just below 106.30 after hitting a three-month bottom of 105.155 in the previous session.

10-Year Treasuries Weekly

Treasury yields, benchmarked to the US 10-Year note, was at 3.825 after dropping to a six-week low of 3.785 earlier.

Gold futures for delivery in December on New York's COMEX was at $1,778 an ounce, after hitting a 13-week high of $1,784.85 in the previous session.

Spot gold, which chartists such as Dixit tend to follow more closely than COMEX futures, was at $1,775, after a 13-week high at $1,786.43.

SKCharting projects that the Dollar Index will move sideways with an ongoing bearish mood aiming at the 50-week Exponential Moving Average of 104.35. But an upside above 107.20 may help the index rally to at least the weekly Middle Bollinger Band level of 109, he said.

"Looking at 10-year bond yields, a further drop to 103.50 seems very likely and that itself can help take gold to between $1,800 and $1,805. On the other hand, a consolidation above 3.85 on can cause yields to rise to 104."

"Any strong move above 104 may result in yields moving up further towards 104.25 and 104.45 and that can push gold down towards $1,750 and $1,730 over the short term."

As spot gold continued to smash through multiple resistance levels on the daily chart, it faces short-term resistance too as prices approach the critical 200-Day Simple Moving Average of $1,803, said Dixit.

"Buyer hesitation is visible and a break below $1,766 may cause some correction towards the support areas of $1,752 and $1,732 as the Daily Relative Strength Index reaches overbought conditions at 70 and Daily Stochastics of 93/95 favor exhaustion, though the correction may be short-lived," he added.

"The important thing to remember is that gold is in a bullish track now, buyers are likely to resurface in anticipation of the next rally towards $1,850."

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.