Gold price has crawled back in the past few days, moving from this month’s low of $4,110 to the current $4,177. This rebound coincided with the falling crude oil prices as the US and Iranian mediators continued talking. Still, XAU/USD is forming a bearish flag pattern, pointing to a bearish breakout.
Gold is rising as crude oil stabilizes
Gold, the most popular precious metal, has risen modestly in the past few days as traders focus on the developments in the Middle East.
In a statement to Axios on Sunday, just before the oil markets opened, President Donald Trump said that oil talks with Iran would resume this week. A day earlier, he had rejected Iran’s seven-point proposal.
This week, mediators are trying to have the two sides reach an agreement that may reopen the Strait of Hormuz, which explains why oil is falling. Brent, the global benchmark, has retreated to $95, while the West Texas Intermediate (WTI) fell to $88. Oil is also falling amid reports that millions of barrels are crossing the Strait.
Falling oil prices are important for gold because of the implications for inflation, which has remained above the 2% target in the past few years, pushing the Federal Reserve to hike interest rates.
Still, gold faces some major risks ahead. One of them is that October may see an escalation between Iran and the US. In this, Iran may decide to launch an October Surprise to impact the midterm elections. This could include sustained attacks against US bases or even the strike carrier group.
Soaring US bond yields
The other potential risk that may drive gold prices lower is the bond market, which is showing signs of weakness. The ten-year yield has already crossed the 5.23% milestone, while the five-year crossed the 5% level this month.
US bond yields are rising because of the soaring US public debt, which has already crossed the $40.2 trillion milestone. And, the US government is not making any efforts to lower the deficit. Trump has proposed giving American adults $5,000 checks if Republicans win.
Gold tends to underperform the market whenever bond yields are rising because it does not pay a monthly return. These developments explain why ETFs tracking short-term government bonds have seen a surge in inflows, while the popular GLD and IAU ETFs have wavered.
Gold price is forming a bearish flag pattern
XAUUSD chart | Source: TradingView
The daily chart shows that gold has been under pressure in the past few months as US government bond yields have soared. As a result, it has consistently remained below the 50-day Exponential Moving Average (EMA).
Gold has also slowly formed a bearish flag pattern, which happens whenever an asset makes a big dive that is followed by a rising channel. This pattern normally leads to a bearish continuation. If this happens, gold may drop to this month’s low of $4,110. A drop below that level will point to more downside towards $4,000.
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