Where Do The U.S. Dollar, Yields Have To Be For Gold To Recapture $1,800?

The dollar is on a tear again and woe betide the commodities caught in its path, especially gold.

From crude oil to corn to cocoa, the natural resources sector was a sea of red on Wednesday as the Dollar Index, which pits the greenback against the euro and five other currencies, hit a new 20-year high, raising the acquisition cost for raw materials when anything other than dollars is used.

While the price of almost every commodity fell, gold wasn’t singled out for any "special treatment" by the dollar this time. The spot price of bullion was down just 0.3% compared to the 1.7% drop in West Texas Intermediate crude at the time of writing.

Charts by SKCharting.com, with data powered by Investing.com

But gold had been the dollar’s favorite whipping boy for months prior to this—six months to be precise. In that span, it has lost some $370, or 18%, from March’s near-record-high of $2,078.80 an ounce. In Wednesday’s Asian trading hours, the spot price hovered at just under $1,700.

The dollar aside, gold’s upside has also been destroyed since the start of the year by runaway bond yields.

The Federal Reserve’s most aggressive rate hikes in 40 years to curb inflation growing at a similar pace has enabled the dollar and US Treasury yields to rally with little stop since the start of the year.

On Wednesday, the yield on the benchmark 10-year Treasury note hit a three-month high of 3.36%, versus its December close of 1.51% amid expectations that the Fed is likely to approve its third straight 75 basis point rate hike when it meets Sept. 21.

Ed Moya, analyst at online trading platform OANDA, said gold was in dangerous territory of falling to the mid-or-lower $1,600s with both the dollar and bond yields skyrocketing.

"The U.S. economy is looking pretty good and that has many traders starting to doubt that we’ve seen the peak in yields."

"Gold is in trouble here if the bond market selloff is the dominant theme of the trading week. Fixed income markets are getting flooded with corporate debt offerings and central banks seem like they will be aggressive with front loading rate hikes right now. It could get ugly quickly if gold breaks below $1690 level as there isn’t much support until $1650."

Gold bulls, of course, have different ideas of where bullion should be, with the first aim being to shore it above $1,750, and then to $1,800 and above.

So, where do the dollar and yields have to be, for gold to be at $1,800?/h2

The answer, at least from the correlation charts of the three, is that the dollar has to drop below 104.50 and bond yields have to go below 2.50, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Dixit explains:

"Six months of continuous declines have left the spot price of gold in extreme oversold territory, with a monthly stochastics reading of 3.5/10.9 and a weekly Stochastics reading 7/17."

"On the downside, gold is likely to test the 200-week Simple Moving Average of $1,673 and the 50-month Exponential Moving Average of $1671 which usually acts as support. Considering the oversold stochastic conditions, a short term rebound is a better probability than any major drop below $1,670."

Should gold start to rebound, the first resistance points would be $1,726 and $1,765, Dixit said.

"A consolidation above this zone can take spot gold higher towards $1,808 which will confirm the double bottom," he added.

The Dollar Index, in its steady bolting to two-decade highs, is likely to reach 112, Dixit said. Adding:

"The dollar’s monthly stochastics reading of 98.8/92 and the weekly stochastics reading of 97.40/95.50 both have reached overbought conditions and call for a corrective drop."

"A trade below 108.60 should be the initial sign of exhaustion for the dollar, followed by a weekly close below 104.50 to confirm the correction."

As for yields, the 10-year Treasury note is likely to extend higher above 3.5% when the dollar reaches 112, Dixit said.

"Bond yields may have an ideal positioning below 2.50 at some point."

"Thus, $1,800 gold may be on the horizon when the Dollar Index corrects to 104.5 and 10-year yield reaches below 2.50."

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Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.