Gold has a demand problem
Whether that dynamic reverses will depend heavily on the evolving macro backdrop, and specifically whether markets conclude that expectations for further rate hikes and the move higher in bond yields have gone too far. For now, however, investors are finding more compelling opportunities elsewhere. That has resulted in something of a buyer strike in gold, with momentum turning lower and the technical picture deteriorating.
Momentum has historically been one of the standout strategies when trading gold. The fundamental inputs driving price are not always immediately obvious. At different stages, gold can trade as an expression of currency debasement, falling real rates, US dollar weakness, concerns around Federal Reserve independence, geopolitical risk, or increased reserve buying from China and other emerging-market central banks.
Ultimately, all these factors feed into price.
That combination helped drive gold around 18% higher between late July and its 25 August high of $4696. Since then, however, XAUUSD has consistently struggled to hold the rallies. A short-term downtrend has developed, buyers have become less aggressive, and the bulls have been unable to make upside moves stick.
Gold investment flows have softened
One notable change has been the lack of strong investment flows.
We haven't seen the degree of inflows into the GLD ETF or Chinese gold ETFs that would typically reinforce a sustained move higher in the underlying gold price.
The gold options market has also changed significantly.
A month ago, traders were prepared to pay a premium for upside exposure. One-month XAU implied volatility showed increased demand for calls relative to puts. As gold rallied, options dealers could be required to hedge their changing delta exposure by buying the underlying market, potentially reinforcing the move higher.
That dynamic has now shifted. Traders are increasingly paying for downside protection through puts, highlighting a more defensive bias in positioning.
Higher interest rates have become a major headwind
The biggest macro challenge for gold, however, is the repricing of global interest rates.
G10 central banks have collectively turned more hawkish. The Federal Reserve has recently raised rates, alongside moves from the RBA, ECB and Bank of Japan. The question facing markets is no longer simply when central banks will ease, but whether additional rate hikes could still be required.
That matters enormously for gold.
Market pricing for the potential peak in the Federal Reserve's policy rate has increased sharply since 25 August, around the same time gold peaked and began trending lower.
The relationship is even clearer when we look at real yields.
Why real yields matter for the gold price
US 10-year real yields recently reached a multi-year high around 2.93%, while 30-year real yields have broken higher and continue to trend upwards.
This is an important distinction.
Investors often focus on nominal Treasury yields, but for gold, the inflation-adjusted or "real" return available on government bonds can be even more important. When real yields rise, investors can earn a higher inflation-adjusted return from an interest-bearing, relatively low-risk asset.
Gold, by contrast, doesn't pay interest.
The higher the real return available elsewhere, the greater the opportunity cost of holding gold. Rising real yields have therefore become a significant headwind for XAUUSD.
Have markets priced too many rate hikes?
The question now is whether the repricing in interest-rate expectations has gone too far.
US economic growth has remained relatively resilient, but inflation remains the critical issue for both the Federal Reserve and financial markets. The prospect of another rate hike will depend heavily on incoming economic data, with inflation releases taking on increased importance.
US 10yr real rates
If inflation cools and some of the assumed rate hikes are subsequently priced out of the rates market, real yields could decline and gold may find renewed support.
Conversely, if inflation remains persistent and markets continue to price a higher terminal policy rate, the macro backdrop could remain challenging for gold.
XAUUSD technical analysis: key levels to watch
The technical picture has also deteriorated.
XAUUSD recently broke below $4250, an important area representing both the September double bottom and the 61.8% retracement of the July-to-August rally.
For now, rallies are being sold and short-term momentum remains skewed lower.
The next important downside level is the 28 September low around $4110. A sustained break below this area would strengthen the bearish momentum signal and could potentially bring the July lows back into focus, an area where strong demand previously emerged.
On the upside, the first hurdle is a recovery above $4275. Beyond that, 43.80 becomes the more significant level.
Until XAUUSD can reclaim those areas, it is difficult to make a strong technical case that the medium-term uptrend has resumed.
Gold volatility continues to offer trading opportunities
While the directional trend has weakened, gold's trading conditions remain attractive for short-term participants.
Daily high-to-low ranges continue to provide meaningful intraday movement. Realised volatility has moderated from previous extremes, but there remains enough price movement to keep short-term traders engaged.
Importantly, the relationship between gold's average trading range and transaction costs remains attractive. For active traders, that movement-to-cost ratio continues to make XAUUSD one of the more interesting short-term markets.
Gold outlook: what happens next?
The key question for gold traders is whether interest-rate expectations and real yields have moved too far, or whether there is further repricing still to come.
That relationship could determine the next major move in XAUUSD.
For now, the combination of softer investment demand, less supportive options positioning, rising real yields and deteriorating price momentum favours a more cautious stance toward gold.
However, the macro environment can change quickly. A softer run of inflation data, falling real yields or renewed investment and central-bank demand could change the equation.
Until then, momentum remains lower, with $4110 the key downside level to watch and $4275 followed by $4380 the important levels the bulls need to reclaim.
