Video

John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 10 March 2015 at 9:58 GMT

Gold: Dollar and US bonds providing the clues

Head of Commodity Strategy / Saxo Bank
Denmark
  • Dollar rally has put commodity sector on back foot
  • Rising US bond yields add to pressure on precious metals
  • Investors cut bullish exposure to 24 commodities 29% last week

By Ole Hansen

Gold has fallen sharply recently during a time when the European Central Bank has begun its expanded asset-purchase programme, while in US another strong job report has potentially brought forward the timing of the first rate hike. 

These events have helped the dollar resume its rally while US bond yields have moved higher, both of which have put pressure on precious metals.

Gold managed to disconnect from the advancing dollar back in November and this lasted until the end of January. During this time raised concerns about Greece and the Swiss National Bank's decision to remove the euro peg both provided support. 

As these risks faded and the attention once again turned to the rising dollar and during the past week, especially after another strong job report, the dollar has been the main determining factor driving gold. 

Gold and the dollar


While the strong (adverse) correlation against the dollar faded back in November the focus on US bond yields picked up, and as the chart below shows this correlation has been relatively strong ever since. 

Gold and 10-year US bond yields
 
Where do we go from here?

At the moment the dollar is back in the driving seat and getting in the way of this advance has proved costly during the past month. The dollar rally has been widespread against most currencies, not least emerging market currencies, which in turn has helped put the whole commodity sector under pressure. 

Hedge funds cut their net-long exposure to 24 major commodities by almost 30% during the week of March 3 and this highlights the pressure the sector is currently under.

RSI readings have, however, moved into overbought territory for the dollar, while gold is now oversold. Back in November the sharp sell-off to $1,150 triggered a strong buying response, both from speculative traders and physical buyers. 

As we once approach this area we should see the selling pressure slow, but whether it will be enough to reverse it will be determined by the greenback. 

 Source: Saxo Bank

– Edited by Oliver Morrison

Ole Hansen is head of commodity strategy at Saxo Bank

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