In our opinion, the FOMC press release of March 16 (blue dashed vertical) marks a significant pivot to market dynamics. This announcement included the Fed's confirmation of its intent to normalise its balance sheet through quantitative tightening (QT). Since then, intermarket relationships have emerged as the markets discount the siphoning of liquidity out of the economy.
One such relationship is between real rates and gold. As real rates charted a higher trough (HT) followed by a higher peak (HP), XAUUSD (middle) charted a lower peak (LP) followed by a lower trough (LT). As a result, real interest rates turned positive, and the correlation coefficient between the two, which was positive, swivelled and turned negative. The inverse relationship has now locked in at a strong -0.72 correlation coefficient (blue rectangle).
This association suggests that, given the market turmoil, market participants chose to rotate funds towards the positive real rate, at the expense of the precious metal. This direction intuitively makes sense.
QT implies a scarcer dollar, which is greenback supportive. Because gold is priced in dollars (now to be supported), the natural flow would be from gold towards favourable real rates.
Since July 18, real rates have fallen, and, sensically, XAUUSD has benefitted as participants reversed the money flow. However, it is unlikely that real rates will be able to switch permanently due to the Fed's war on inflation. If this assumption is correct, the current rally in gold may chart the next lower peak in the series. I.e. a rally in a broader downtrend scenario. We continue to monitor for signs of a swing high as this will be the precursor if gold is set for another leg down.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.