How Bond Yields Are Affecting Gold

As U.S. Treasury yields rise, gold, which is seen as an inflation hedge, is hurting. Despite the obvious warning signs, investors remain bullish.

After Monday’s (Feb. 22) supposedly “groundbreaking” rally, the situation in gold developed in tune with what I wrote yesterday. The rally stopped, and miners’ decline indicated that it was a counter-trend move.

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Figure 1

Despite Monday’s (quite sharp for a daily move) upswing, the breakdown below the neck level of the broad head-and-shoulders remains intact. It wasn’t invalidated. In fact, based on Monday’s rally and yesterday’s (Feb. 23) decline, it was verified. One of the trading guidelines is to wait for the verification of the breakdown below the H&S pattern before entering a position.

What about gold stocks ratio with other stocks?

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Figure 2

It’s exactly the same thing. The breakdown below the rising long-term support line remains intact. The recent upswing was just a quick comeback to the broken line that didn’t take it above it. Conversely, the HUI to S&P 500 ratio declined once again.

Consequently, bearish implications of the breakdowns remain up-to-date. Having said that, let’s consider the more fundamental side of things.

Swimming Against the Current

After trading lower for six consecutive days, gold managed to muster a three-day winning streak. However, with the waves chopping and the ripple gaining steam, every swim higher requires more energy and yield’s decelerating results.

For weeks, I’ve been warning that a declining copper/U.S. 10-Year Treasury yield ratio signaled a further downside for gold. And with the ratio declining by 2.88% last week, gold suffered a 2.51% drawdown.

Please see below:

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Figure 3

Over the long-term, the ratio is a reliable predictor of the yellow metal’s future direction. And even though the weekly reading (3.04) hit its lowest level since May 2020, it still has plenty of room to move lower.

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