Have you seen the recent movements in gold prices?

Over the past few weeks, the precious metal has cut through multiple levels of support like a hot knife through butter. One would have expected gold to draw ample strength from the great reflation trade, yet prices are down over 10% since the start of 2021.

It is becoming clear that gold remains under the mercy of an appreciating dollar and rising bond yields.

The low-down…

Back in 2020, when the Covid menace created extraordinary levels of uncertainty and chaos, central banks were embarking on aggressive interest rate cuts. Unprecedented measures were enforced with stimulus injected into the financial system to prevent markets from flat-lining. This all sent bond prices through the roof, dragging yields to rock-bottom levels.

Fast forward to the present day, bond prices are falling thanks to growth optimism and inflation expectations. Given how inflation remains the arch-enemy of bond markets as it shaves away the real value of the fixed-interest payments, bonds may become depressed and somewhat unloved moving forward.

Why does this even matter?

Well, gold is seen as a hedge against inflation but is also a zero-yielding asset.

The precious metal is not only trapped in a fierce battle against rising bond yields but prospects of higher interest rates in the face of accelerating inflation!

Fundamentally, the pendulum swings in favour of bears especially when factoring in how global sentiment is improving on vaccine rollouts and Covid-19 cases are falling globally.

How about the great reflation trade?

The good news is that Senate passed President Biden’s $1.9 trillion stimulus package over the weekend…but the bad news is that could fuel expectations over faster inflation. Such will most likely spell more trouble for Gold despite its status as an inflation hedge as markets focus on rising yields.

Will Gold find a friend in Oil?

So far so good, oil is proving to be an unreliable friend.

One would have expected the recent jump in Brent crude oil to benefit gold (the inflation hedge), given how rising oil may lead to higher transport costs and prices for many goods. However, the precious metal has extended losses as inflation expectations hit bond markets.

Time to talk technicals 

Prices are heavily oversold on the daily charts as the RSI is below the 30.00 level. This could provide an opportunity for bulls to make a counterattack with $1730 acting as a pivotal level.

But the weekly and monthly timeframe suggest further downside with $1670.50 and $1608 acting as key levels of interest.