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US yields rise back near 4-year highs; Gold set for move lower?

Summary:

  • The Tnote has fallen back near a multi-year low
  • Rising yields could be seen to weigh on Gold
  • Gold back to flat for the year and technicals could be turning lower

Yields have gained a lot of coverage over the past week with the rise in fixed income returns seen of late widely attributed as a contributing factor to the stock market rout last Friday and this Monday. The increase in yields hasn’t been anywhere near as dramatic as the moves in stocks, with US yields being in a fairly consistent uptrend since the 2016 election. The yield on the US 10-year Treasury note (Tnote on xStation) is calculated inversely to price and once can see that this market has been declining steadily for some time now - implying rising yields. 

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 The TNOTE has been falling since the US election and is currently close to its lowest level since 2011. Source: xStation

Precious metals have exhibited a fairly strong correlation with the Tnote over the past with both assets moving inversely to US rates; both rallied strongly during and after the last financial crisis as the US cut rates and embarked on several round of QE. Comparing the Tnote to Gold since the US election reveals some interesting moves with both markets initially dropping on the expectation of higher rates before steadily rising for the first 7-8 months of 2017 as Trump’s policy failed to be implemented as expected. From the start of September last year however there has been a disconnect which has grown more apparent in recent months as the Tnote has fallen to multi-year lows whilst Gold has moved above the level seen prior to the US election. 

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 Recent months have seen a large disconnect between the Tnote and the price of Gold. Source: xStation

Whilst the correlation analysis is far form an exact science it suggests that their could be downward pressure on the price of Gold going forward. Looking specifically at the Gold chart price is currently at an interesting level. The recent low is just above 1306 which has previously acted as first resistance and then support and this may now be viewed as a key level. If price holds here then the last few days of declines may be recovered somewhat but a break below here would pave the way for a larger correction. 

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 Gold could be set to print a bearish cross on the 8 and 21 EMAs and a break below 1306 would pave the way for a deeper correction. Source: xStation

In addition, the 8 and 21 EMAs look set to print a bearish cross (8 moving below 21) which has previously occurred before prolonged declines. Twice in the past 6 months has there been a bearish cross printed and both time the market continued to decline for several days afterwards. A bullish cross (8 above 21) was printed back in December and preceded a rally of almost $100 to the upside. Finally, and perhaps most tellingly of all, the price action on Monday’s declines could be revealing in showing that the upside momentum has waned. Prior periods of plunging stocks (Brexit, initial reaction to US election etc) have seen a sharp spike higher in Gold, but Monday’s gains were relatively muted. Price rallied around 1% on the day form low to high and with these gains promptly erased with a bearish engulfing candle the following day it is apparent that the market is looking a little weak. 

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