Is Gold’s Rally Over? Here Are Five Key Charts to Watch

Is Gold’s Rally Over? Here Are Five Key Charts to Watch by Eddie Spence, Bloomberg News

Gold’s slump this week is forcing investors to ask whether the haven asset is taking a breather or facing an even sharper decline.

Unprecedented global stimulus, negative real rates and a weakening dollar pushed bullion to a record high above $2,075 an ounce in early August. While some banks, including Goldman Sachs Group Inc. and Bank of America Corp., forecast even higher prices, a resurgent dollar has seen gold give up some of its gains.

Is this merely a temporary setback for the precious metal? Here are five charts that provide hints as to where gold goes next:

Dollar Dominance

The key driver of gold right now is the dollar. This week the U.S. currency strengthened, even as the Federal Reserve remained ultra dovish on interest rates. The dollar’s newfound vigor is linked to fading hopes of more stimulus from the U.S. That’s depressed gold, even as Covid-19 infections spike across Europe and fatalities exceed 200,000 in the U.S.

“The firm U.S. dollar is like a millstone around the neck of precious metals prices, and is putting pressure on gold despite increased risk aversion,” Carsten Fritsch, an analyst at Commerzbank AG, wrote in a note. Still, Fed policy will remain expansionary for years, so “the strength of the dollar is hardly likely to last,” he said.

Plateauing Rates

Gold’s investment appeal over the summer was burnished as real treasury rates slid deeper into negative territory. Since early August, those rates have been flat, and it will take a significant boost to inflation expectations to drive them lower.

Breakevens — measures that draw on pricing of nominal and inflation-linked Treasury debt to create a proxy for price gains — have been declining since August. With the global economic recovery stuttering as the virus flares, inflation is unlikely to be uppermost in the minds of investors, according to Ole Hansen, head of commodity strategy at Saxo Bank A/S.

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