Gold Prices Tepid Despite Lower Yields Post-CPI. Is the Bullish Case Over?

Gold was on a wild ride on Wednesday. In early morning trading, the precious metal managed to rally nearly 0.85% after softer-than-expected U.S. CPI data sparked a steep pullback in U.S. Treasury yields. The advance, however, was short-lived, with XAU/USD back in negative territory by late afternoon in New York, sliding about 0.2% to $2,035 at the time of writing.

Bullion’s counter-intuitive reaction to the move in bonds indicates that the “slowing inflation” theme may have already been pre-traded; after all, prices have risen more than 11% since early March, so the rally was clearly stretched. This suggests that nominal bond yields would have to fall much further in order to see higher highs and possibly a fresh record in the yellow metal.

The pre-condition for gold to regain its sparkle is unlikely to be a tall bar to clear. Growing headwinds for the U.S. economy, including tightening credit conditions for businesses and households in the aftermath of the U.S. banking sector turmoil that first erupted in March, may tip the country into a painful recession later this year.

With the worsening economic outlook, forward-looking traders will try to get ahead of the Fed and attempt to front-run steep rate cuts, exerting downward pressure on the Treasury curve. Against this backdrop, it is only a matter of time before the 10-year yield heads toward new multi-month lows below 3.25%, which was its April trough in 2023.

The specter of a recession, coupled with the unresolved U.S. debt ceiling drama, could soon begin to drive increased demand for safe-haven assets. Gold, historically considered a defensive asset, would stand to benefit from the flight-to-safety episodes in financial markets. For these reasons, the XAU/USD’s bullish bias remains intact for now.

GOLD PRICES TECHNICAL ANALYSIS

While the direction of travel is likely higher, a period of consolidation should not be ruled out following the strong rally witnessed over the past two months. This means gold could stay trapped in a narrow range in the near term.

In terms of key tech thresholds to watch, initial support rests at the psychological $2,000 level, but if this floor is breached, we could see a pullback toward $1,975. On the upside, the first resistance to consider appears at $2,050. If bulls manage to take out this barrier, however, a retest of the 2023 highs could materialize shortly thereafter.

GOLD PRICES TECHNICAL CHART

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