The Secret Sauce For Trading Gold

Gold has been touted as an inflation hedge and as a stagflationary play, so why are prices not soaring right now? What’s the missing secret sauce? You could be forgiven for asking this question as high inflation and slowing growth prints have been increasing over the last few weeks. On Monday Chinese activity showed signs of slowing with industrial production well down at -2.9% vs 0.4% expected. In the US Goldman Sachs lowered the US GDP growth forecast to 1.6% from 2.2%. The Bank of England signaled that the UK’s GDP would be negative in 2023, but inflation could peak at 10% this year. 
 

So, why is gold not surging higher?

Gold is testing the major trend line lower marked on the monthly chart below around the $1800 region. 

(Click on image to enlarge)

Gold tests major weekly trendline

The reason for gold remaining pressured lower is due to the interplay between real yields and the USD. Now, many traders know that strength in the USD is a headwind for gold. This provides part of the reason for gold weakness. The USD index moved above 104 on both Fed’s monetary policy and signs of slowing global growth. However, what is the ‘secret sauce’ for getting a handle on gold? What’s the shift to look for?
 

Real yields are still elevated

Real yields are simply the US  bond yield minus inflation expectations. So, if the nominal bond yield is 5%, but inflation is 6% then the real yield is -1%. 

When real yields fall that lifts gold prices. So, real yields have pulled back a little, but they are still relatively elevated. 

So, a strong USD and relatively elevated real yields are keeping gold prices pressured. Look at the chart below (Gold is in yellow, TIPS is in blue, and DXY is in Purple)

(Click on image to enlarge)

Real yields and gold

The secret sauce for trading gold

What serious gold buyers are looking for is an environment where real yields and the USD are both falling. When this happens gold tends to gain extremely quickly! Look at the chart below where falling really yields and a falling USD sends gold surging higher. Please note that on this chart I use a TIPS ETF as a proxy for real yields as real yields are only updated once a day.

(Click on image to enlarge)

Falling yields and falling USD = gold gains

So the ‘secret sauce’ for trading gold is this at the moment: 

  • Rising real yields and rising USD = gold pressured
  • Falling real yields and falling USD = gold upside

As long as this dynamic remains gold traders should pay attention to it. 

Disclosure: High Risk Investment Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs ...

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Krypto King 1 month ago Member's comment

Giddyup!

Giles Coghlan 1 month ago Author's comment

I know - patience, patience....😀

Michelle Bell 1 month ago Member's comment

It’s going to lose that “trend line”- everyone see the same so everyone thinks that trend line is real (It’s not)

Giles Coghlan 1 month ago Author's comment

Hi Michelle, 

Thanks for responding. 

The key to understanding gold's price is to first of all see how bond yields, inflation and the USD impact prices. Then, once the fundamentals are in place, you start looking at the technicals to manage risk. 

So, it's not really a case of a trendlibe 'working' or not, but more a case of what's the fundamental cae and then how can I use technicals to manage that risk. 

Does that make sense?