One way to look at XAU/USD is like any other USD pair such as EUR/USD and GBP/USD. When the dollar rises, gold falls and when the dollar falls, gold rises. But it is a bit more complicated, with a better correlation to US 10-year bond yields.
Returns on American 10-year debt is considered the global benchmark against which everything is measured. It is the safest long-term asset – and therefore competes with gold, which is seen as another long-term safe haven.
While US 10-year bonds provide a return of 3.46% yearly, gold has no yield. People who buy US debt get a return and those who hold gold don’t. Therefore, the reason to buy gold is only speculative – expecting its price to rise.
When yields rise, it become more attractive to buy bonds and less attractive to buy gold. When yields fall, yield less gold is more attractive.
The recent increase in US yields, as a result of rising expectations for Fed rate hikes, is the reason behind gold’s decline. To see gold shining again, we would need inflation expectations to fall.
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