Gold Holds Firm Amid Extreme Rates Move, CPI Data Looms

Gold has shown remarkable resilience in the face of extreme front-end Treasury repricing and a violent rates move, which has led to a significant rise in US yields. Over the past fortnight, gold's traditional macro headwinds have returned, with bond markets experiencing a rout and the US dollar rebounding.

The 10-day correlation between gold and US two-year yields has strengthened to around -0.81, indicating that gold is behaving as expected given the circumstances. However, the magnitude of the response has been anything but ordinary, with bullion holding firm despite an extraordinary lift in US yields.

Since September 3, 2-year yields have risen 21.6bp and five-year yields 22.4bp, while from August 26 the increases swell to 32.6bp and 35.2bp respectively. These moves sit around the 98th percentile of comparable observations since 2010.

The price remains in a firm downtrend from the highs set in late August, with the latest pullback taking it beneath the 23.6% Fib retracement of January to June bear move. The area between that level and the recent low of $4,283 has repeatedly absorbed selling since the start of August, making it the key zone to watch heading into the release of US CPI for August later in the session.

The technical setup suggests the risk of an eventual downside break may be growing, although confirmation from price action will be required. A clean break beneath $4,283, particularly if followed by a backtest and rejection of the level from below, would bring $4,220 into view initially, followed by $4,165.

The US inflation report due later Friday will likely determine whether gold's resilience can persist or not. A stronger-than-expected print that lifts pricing for a rate increase beyond its current level of around 70% would likely push front-end yields higher and bolster the US dollar, adding to downside risk for bullion.