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But when yields fell deeper into negative territory in the past month, gold prices didn’t benefit.

That shows how negative bullion sentiment has turned after the metal’s relatively poor performance this year. Gold is an asset that thrives on momentum and can be left vulnerable if the price does not rebound for a long time. Further hikes in real rates driven by strong economic data could lead to more precipitous falls.

Inflation fading

Whether the rise in prices associated with reopening economies will be transitory or persistent has been a major issue for markets in 2021. Gold’s relationship to inflation is complicated: it is often touted as a hedge against runaway profits from prices, but historically it has tended to benefit mainly when they coincide with periods of high unemployment.

So far, the market is pricing in transitory inflation, as evidenced by the drop in US equilibrium rates further down the curve. That would mean healthy and controlled price increases that would not benefit gold. The consumer price index to be released on Wednesday will be the latest indicator for investors and is expected to be more subdued compared to previous months.

“It’s difficult for me to be bullish for gold right now,” said Marcus Garvey, Macquarie Group’s chief metals strategy officer. “If it softens and shows that some of the recent price gains are waning, then there is less bullish momentum for inflation. But that doesn’t really lower tuning expectations because inflation is already enough to check the box. “

“Gold is now technically toasted and requires some stamina to avoid some key levels.”

Nicky Shiels, Head of Metals Strategy at MKS (Switzerland) SA

Return of the US dollar

One of the main drivers of gold’s strong performance last year was a prolonged weakening of the dollar. Fast forward to 2021 and there are signs that we can see the trend reversing, putting pressure on the bullion.

Strong US employment data raised expectations for rate hikes from the Fed, giving the dollar its biggest gain in about a month on Friday. Meanwhile, money markets indicate that the European Central Bank will not adjust until at least mid-2024. That sets the stage for a stronger dollar, which would hurt gold.

Techniques

Gold’s slide has broken below the neckline of a weekly head and shoulders pattern that may embolden bears in the medium term. Unless gold ends the week above the neckline, which is currently at about $ 1,760, the outlook will remain weak based on technical analysis.

Prices were also tested and broke below the 100-week simple moving average, before reversing. This average has offered price support most of the time since the December 2015 low. It sits at $ 1,738 for this week and will be watched closely by bulls and bears alike.

“Gold is now technically toasted and requires some resistance to avoid some key levels,” Nicky Shiels, head of metals strategy at MKS (Switzerland) SA, wrote in a note. “At the top, a rally to $ 1750 would help install confidence (and slow down a move down).”

ETF exodus

Bullion-backed exchange-traded funds were a mainstay in pushing the metal to a record last year. But successful vaccine launches and stronger-than-expected recoveries in the Western world led investors ranging from family offices to pension funds to significantly cut their ETF holdings this year, particularly in the first quarter.

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To be sure, ETF holdings remain at historically high levels. And a rebound in gold imports in India, the main consumer, could offer price support, while demand was hit earlier this year by the emergence of the delta variant of the coronavirus, the increase in imports shows that the appetite for gold may be starting to pick up.

Bloomberg