Gold Prices Plunge to Six-Month Low as Investors Flee to Fixed Income

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Gold prices have fallen to their lowest level since March, as rising Treasury yields and a stronger dollar have dampened the appeal of the precious metal. The yellow metal is now on track to enter a bearish trend, with prices approaching a “death cross,” a technical term indicating a potential decline.

What is a death cross and why does it matter?

A death cross occurs when an investment’s short-term moving average falls below a longer-term moving average. This signals a shift in momentum and a possible reversal of the previous uptrend. The last time the gold market saw a death cross was in July 2022, and that led to four months of declining gold prices, then a very sharp rebound going into 2023.

However, this time, the outlook for gold seems more bleak, as the factors that boosted its demand last year have faded or reversed. The global economy is recovering from the pandemic, inflation fears have eased, and the Federal Reserve is expected to taper its bond-buying program and raise interest rates sooner than anticipated. These developments have boosted the yields and the value of the U.S. dollar, making gold less attractive as a safe-haven asset and a hedge against inflation.

How low can gold go?

Gold futures for December delivery fell $18.90, or 1%, to settle at $1,847.20 an ounce on Comex Monday. That was the lowest most-active contract finish since March 9, according to Dow Jones Market Data. Prices lost 5.1% in September and 3.3% in the third quarter.

Gold Prices Plunge to Six-Month Low

Some analysts believe that gold could break below the $1,800 level if the 10-year Treasury yield rallies above 5%. The yield on the 10-year Treasury was at 4.674% on Monday, up from 4.572% on Friday, after the U.S. government averted a weekend shutdown. The yield has risen more than 1.5 percentage points since the start of the year, reflecting the improved economic outlook and the reduced appetite for risk-free assets.

Gold is in the “danger zone,” and it will plunge below the $1,800 level if the 10-year Treasury yield rallies above 5%, said Edward Moya, senior market analyst at OANDA. He expects gold to “have its moment in the sun when the peak in the [U.S.] dollar is in place.”

Is there any hope for gold bulls?

Not all is lost for gold bulls, however. Some factors could still support the demand for gold in the medium to long term. These include:

  • The uncertainty and volatility in the global geopolitical and financial landscape, such as the tensions between the U.S. and China, the debt crisis in China, the COVID-19 variants, and the social unrest in various countries.
  • The persistent fiscal and monetary stimulus from governments and central banks around the world, which could eventually lead to higher inflation and currency debasement.
  • The diversification and portfolio allocation benefits of holding gold as a non-correlated asset that can hedge against market shocks and tail risks.
  • The growing demand for gold from emerging markets, especially China and India, where gold is seen as a store of value and a symbol of wealth and status.
  • The limited supply of gold from mining and recycling, which could create a supply-demand imbalance and drive up the prices.

Therefore, some analysts remain optimistic about the long-term prospects of gold, and see the current dip as a buying opportunity. They believe that gold could still reach new highs in the future, as it did after the previous death crosses.

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