Rough Start of the Year for Gold – Will the Weakness Continue?

The price of gold made a new all-time high in August 2020. In the middle of the health crisis, investors thought protection against the unknown and bought the yellow metal. 

Traditional investing tells us that gold protects a portfolio against inflation. Also, in times of uncertainty, investors flock to the safety offered by gold. The ultimate bullish sign for gold came from Warren Buffett himself. The legendary investor announced in the middle of the pandemic that its investment vehicle, Berkshire Hathaway purchased shares in Barrick, a gold miner. Nothing appeared to stand in the way of even higher gold prices.

Fast-forward to March 2021, and neither Buffet owns shares in Barrick anymore, nor the price of gold made another high when compared to August last year. In fact, it kept declining from the highs. Moreover, in 2021 alone, in the first two months of the trading year, the price of gold lost 16.78% YTD.

Higher USD or Lower Gold?

Like any financial asset, one can look at gold as denominated in other fiat currencies. We can talk about gold against EUR, GBP, or AUD, but the industry’s benchmark remains the XAUUSD – the price of gold expressed in American dollars.

Gold currently trades around $1,700 against the U.S. dollar, a sharp decline since the move above $2,000 last year. Yet, the dollar did not strengthen in the meantime. More precisely, the dollar has declined against most rivals – EUR, AUD, GBP, and only recently it shows some signs of relative strength. Will it be a sharp reversal or just a consolidation before another leg lower? No one knows at this point.

That leaves us with a big dilemma – XAUUSD in a bearish trend, while the dollar index (DXY) moves in a similar fashion. What to make out of this divergence?

One way to look at it is that the price of gold leads the move in the dollar. More precisely, that the dollar’s reversal will be so sharp that it will catch up with the decline in the price of gold.

Another way, more realistic, is provided by the chart above. Gold and the U.S. Treasury yields inverse correlation is staggering, to say the least. The stronger the economic recovery investors predict, the higher the yields will rise, and the more the price of gold will decline.