The combined effect of a weaker US Dollar alongside sliding US Treasury yields has proven to be a stabilizing catalyst for one asset class in particular: precious metals. Notably, Gold prices have attempted to halt their decline from their high in April, with the downtrend from April 11 on the precipice of breaking today.
Gold Price: Daily Timeframe (November 2016 to May 2018) (Chart 1)
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The stabilization of Gold prices comes after the sharp decline from April saw price break the symmetrical triangle in place since January, bringing bullion back to the uptrend from the December 2016 and December 2017 lows. But the technical picture is improving, with both MACD and Slow Stochastics now turning higher (albeit still in bearish territory). A close through 1307.65 (last week's high) would confirm that the recent downtrend is over.
There's no doubt that the drop in Gold coincided clearly with the appreciation of the US Dollar alongside higher US Treasury yields; so a break in the US Dollar's uptrend or the uptrend in US yields should prove to be supportive for Gold prices in the short-term.
US Treasury 10-year Yield: Daily Timeframe (August 2017 to May 2018) (Chart 2)
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While US Treasury yields remain in a longer-term uptrend, particularly over the past two years, the impulse that has carried rates higher since September has seemingly evaporated this week. Surrounding fears of a populist government coming to power in Italy, investors have flocked to the relative safety of sovereign bonds.
Moving forward, it would be our base case assumption that ongoing turmoil in Europe - be it due to Italian election fears or a 'no confidence' vote for Spanish Prime Minister Mariano Rajoy - will help drive demand for US Treasuries, in turn keeping yields lower, and therefore provide an opportunity for Gold to regain some of its luster.
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