This week has been extremely unfortunate for gold buyers. The asset continues to develop a strong negative momentum, which began on Mar. 19 and caused the gold price to retreat from the $2,000 resistance. This week, sellers managed to push it even lower, and gold tested the $1,900 mark.
A while ago, gold was close to recording an all-time high, gaining a foothold above $2,070. However, a rise in US Treasury yields coupled with the subsequent strengthening of the dollar supported bearish sentiment and resulted in a trend reversal.
Let us recall that rising Treasury yields increase the opportunity cost of holding assets that do not pay a dividend or coupon income, such as gold. The strengthening of the US dollar is also a negative factor for the precious metals market. It makes commodity assets denominated in the US dollar more expensive for holders of other currencies.
Since gold has started to slip, the yield on the United States 10-Year Treasury note refreshed its 2018 high, approaching 3%, while the US dollar index (DXY) reached its highest level since the beginning of the pandemic, recovering to 102.00 points.
The dollar's active growth contributes to the expectations of further monetary policy tightening in the US. According to forecasts, the Federal Reserve will likely raise interest rates by a half percentage point and initiate quantitative tightening at its next meeting in May.
The greenback's safe-haven properties also support the dollar buyers. China's Covid-19 outbreak and the prospect of lockdowns in Beijing fuel investors' concerns about the global economic outlook.
The crisis in Eastern Europe and rising inflationary expectations limit the XAU/USD decline. Strict anti-COVID restrictions in China could very well trigger major supply chain disruption, which can hit Asia, the US, and Europe, further exacerbating the problem of widespread inflation.
Growing oil prices as a result of Russian state-run gas company Gazprom (MCX:GAZP)'s (OTC:GZPFY) decision to cut gas supplies to Poland and Bulgaria after they refused to pay in rubles is an even greater catalyst for the consumer prices' growth.
If Russia cuts off natural gas supplies to other European countries, the global energy market will face a supply shock, which could drive Brent crude oil above $120, and the EU inflation could reach 8-10%.
Despite all these developments, investors prefer to follow the dollar and US Treasuries, which supports further downtrend in the precious metals market. We believe it's too early to buy gold in the current conditions. We recommend opening your long gold positions only after the XAU/USD pair tests the $1850 support, which should happen in two weeks.