Gold Flirting with a Breakdown

Gold is providing an interesting short opportunity as it circulates above the 1240 level. While we
will look at short-term triggers in coming articles, this post will lay out the longer-term bear case.

The driver of gold prices is real interest rates which are basically the difference between interest
rates and inflation. Currently, we are in a situation where inflation is falling yet short-term
interest rates keep rising due to the desire of central banks to normalize monetary policy.

Below is a chart of the 1 Year US Treasury Yield:

Below is a chart of CPI on a YoY basis which shows it falling below the Feds 2% target.
Conclusion

In some ways, shorting gold is the inverse of the buy the dip trade in stocks when the Fed was
enacting QE. Either the economy was going to improve or the Fed was going to increase the
amount of stimulus, thus stocks would go up on bad news.

Today, the Fed is going to remain on its current path of hiking interest rates despite inflation
falling below its target level. Any increase in interest rates will only serve to accelerate the Feds
timetable for an interest rate hike thus driving golds price lower.

Although gold will provide opportunities on both sides in the coming months, traders will have an
easier time not fighting the bear trend.