Gold price drops as bond yields rise and Goldman Sachs flags key catalyst

Gold price continued its strong downward trend on Monday, reaching its lowest level since March 30th. It was trading at $4,545, down by nearly 20% from its highest point this year. This retreat continued as headwinds rose, even as Goldman Sachs analysts identified a major potential catalyst.

Gold price drops as major headwinds emerge

Gold retreated sharply on Monday as investors remained concerned about the potential for kinetic activity between the United States and Iran. 

In a statement on Sunday, President Donald Trump warned Iran that the clock was ticking as he pushed its leaders to make an agreement. 

Trump has been frustrated because Iran has not caved to the US maximalistic demands, which include reopening the Strait of Hormuz and handing over the nuclear material.

A restart of the war would be catastrophic for the world economy. Crude oil prices would surge, with countries having shortages, especially if Iran decides to shut the Red Sea down. 

That, would, in turn, lead to higher inflation in the US and other countries. A report released by the Bureau of Labor Statistics (BLS) showed that the headline Consumer Price Index (CPI) jumped to 3.8%, while the Producer Price Index (PPI) jumped to 6%. 

Gold price often underperforms in periods of high inflation as this tends to push bond yields higher. Indeed, data shows that the ten-year and thirty-year yields jumped to 4.2% and 5.15% on Monday. This means that the Federal Reserve will likely maintain interest rates at the current level for a while. 

Goldman Sachs predicts gold demand will jump

Gold price has also retreated as concerns about demand remains. India’s Narendra Modi has asked his citizens to avoid buying gold this year as the rupee plunges. Avoiding gold will prevent currency outflows from the country. 

Gold ETFs have also had substantial outflows in the past few months. Data shows that the SPDR Gold ETF (GLD) and the iShares Gold Trust (IAU) have shed billions of dollars in assets this year. 

Still, Goldman Sachs analysts believe that the robust central bank accumulation will be bullish for gold. In a note, the analysts predicted that central banks will keep buying at least 60 tons of gold a month this year, higher than the previous estimate. The 12-month accumulation through March averaged about 50 tons of gold.

XAU price technical analysis

Gold price chart | Source: TradingView

The daily chart shows that gold price has retreated in the past few months, moving from a record high of $5,607 to the current $4,545. It has formed a descending trendline, which connects the highest swings since January this year.

Gold has slumped below the 50-day moving average, a sign that bears remain in control for now. Therefore, the most likely scenario is where gold remains under pressure in the near term.

If this happens, the initial target to watch will be at $4,400. However, a move above the descending trendline will invalidate the bearish outlook and point to more gains. Such a move will lead to more gains, potentially to the psychological point at $5,000.