(Kitco News) - The gold market continues to struggle as bond yields across the curve push to their highest levels in 20 years, and one market strategist is warning investors that the precious metal has room to fall further.
In his latest precious metals note, Fawad Razaqzada, Market Analyst at FOREX.com, said it could be difficult for precious metals to rally as elevated oil prices drive inflation pressures higher, fueling market expectations that the Federal Reserve will have to raise interest rates beyond current projections.
According to the CME FedWatch Tool, markets see a 56% chance of a 50-basis-point rate hike in December. These expectations have pushed U.S. 10-year Treasury yields to 5.15%.
“One of the main reasons why gold and other low- and zero-yielding assets have come under pressure is due to the fact bond markets are slumping. We have seen the US 10-year yields soar above 5.0% and 30-year yields are testing the 2007 highs,” he said. “Gold typically goes up when yields go down as opportunity cost of holding the zero-yielding asset decreases. And when yields rise, gold typically heads lower for the same reason.”
Adding to the bearish fundamental outlook, Razaqzada said gold also faces growing technical headwinds as traders who went long during August’s rally are now stuck.
“Some of traders will have their stops resting below recent lows near $4235. That’s precisely where I think gold is heading to next,” he said. “Gold has been effectively in a larger consolidation/bearish trend since peaked back in January. The series of lower highs and lower lows have not yet been violated to suggest the trend has turned bullish again. Thus, the bigger risk is that we could see further long side liquidation, perhaps much larger than we so far have. If gold continues to head lower from current levels, and goes on to eventually break below support at $4235, then that could pave the way for a continuation towards $4,100 initially, ahead of $4,000 next.”
Although Razaqzada sees growing downside risks, he also noted that market sentiment is extremely fluid and can quickly change.
“If investors lose faith in the Fed and its ability to control inflation or yields, then the dollar debasement trade could resurface and that could be positive for gold, silver and bitcoin, as well as currencies of countries with better fiscal discipline,” he said. “On the upside, key resistance is now seen around $4,300-$4325 area, followed by $4,400. As a minimum, I’d like to see gold break above the $4,400 level on a closing basis before I can drop my bearish gold forecast.”
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