Why gold looks so cheap, downside risks still remain high

Gold is below a multi-week range, suggesting gold prices will continue to decline in the short term amid rising US Treasury yields.

The yellow metal consolidated its week-long losing streak while weakening to a seven-month low below $1,820.

The underlying bullish trend surrounding the US dollar remains intact, with rising US Treasury yields exacerbating the pain in gold prices. Now that it is below the $1,900 support level, traders are cautiously eyeing the $1,800 level, which is a key support level and of course an important and psychologically significant number. The US economy is the main driving force driving gold prices. Its status affects investors’ sentiment towards safe assets, their expectations of interest rates, and their perception of inflation.

Continued hawkish rhetoric from the Fed and ongoing bond market turmoil are driving the U.S. Treasury yields higher, with the benchmark 10-year U.S. Treasury yield at the highest level in 16 years above 4.60%.

Amid rising US Treasury yields and upbeat data, the greenback also received support from a mixed market environment as traders digested news that the US government had avoided closure. However, existing funding is extended for another 45 days which gives the gold bugs some hope that the dollar’s upside might be capped in future.

Early Tuesday, gold prices remained vulnerable to further downside risks, tracking continued demand for the U.S. dollar amid lingering risk-off in Asian trade. China’s Golden Week holiday validates gold price weakness, while metal traders remain cautious ahead of the release of US JOLTS hiring data.

US jobs data will trigger key labor market indicators this week, key to determining the next direction of the US dollar and gold price trends next week.

Gold looks oversold on the daily chart, with the 14-day relative strength index currently below 20 – a level linked to a recovery in mid-2022. However, this is not enough to end the slide. The implication is that significantly oversold conditions will increase the chances of a corrective recovery but not necessarily an end to the downtrend.

A decisive break below $1,805 an ounce would expose the possibility that the spectacular year-long rally since early 2022 is a correction rather than the start of a new uptrend – a point emphasized in recent months.

Gold demand to hedge against a failed soft landing is unlikely to disappear as the US economic outlook in the coming months becomes increasingly challenging. On a physical level, gold prices fell slightly this week in China, the main consumer, but remained high. due to strong investor demand amid a significantly weaker yuan and economic concerns.