XAUUSD IS Benefitting from The Decline in Yield

  • XAUUSD
    (${instrument.percentChange}%)

XAUUSD Weekly Chart
Past performance is not an indicator of future results
Source: www.tradingview.com

The weekly chart above shows gold (XAUUSD) from the beginning of 2019. The indicator below is the correlation coefficient between the precious metal and the US10Y. For most of this period the correlation has been negative (green rectangle). A reason for this is that bonds and gold are both considered safe-havens. During this period the yield on the US10Y dropped below 3% and continued to decline. This effectively erased a fair amount of the opportunity cost of holding gold instead of bonds. As such, gold became a more attractive option as a safe-haven as one is foregoing less interest income. Consider this relationship from Wednesday, following the Fed announcement:

XAUUSD H4 Chart
Past performance is not an indicator of future results
Source: www.tradingview.com

To make the point we reference the XAUUSD 4 hour chart and its correlation to the US10Y. As yields declined after the Fed announcement on Wednesday (blue vertical) and following today's NFP release, gold has appreciated in value. The current correlation is around -0.7 which reflects a very strong inverse relationship during this time.

Given this reaction, it is likely prudent for gold traders to keep an eye on interest rates in the coming weeks.

Russell Shor

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.

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