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  • Gold bugs are bailing out on the first sign of a pause in lower real yields.
  • Weak hands have given way to a 38.2% Fibonacci retracement. 

The price of gold has been bleeding out from the highs of last week, unable to come up for air on Monday without being faded. 

At the time of writing, XAU/USD is trading at $2,026 having travelled between a high of $2,049.91 and $2019.30.

The DXY has been staging a recovery since formulating a double bottom on the 40HR time frame, extending the correction to a high of 93.70 on Monday, some 50 pips higher than the lows. 

That said, there is plenty of scepticism over whether the dollar can sustain a rally, or indeed that investors will not continue to cheerlead US equities while the Federal Reserve extends support for lower for longer.

In precious metals, this is what convexity looks like — as real rates continued to decline in past months, gold’s reaction function has shifted from a linear to a convex relationship, leading to an outsized rally in gold prices,

analysts at TD Securities explained. 

At the same time, however, a marginal increase in real rates on Friday led to a sharp correction in gold, which highlights that the bulls are vulnerable to a modest consolidation in the macro drivers that have supported gold length over the past few months.

Moreover, the analysts warn of a position squeeze.

As positioning has grown to increasingly bloated levels, leaving little dry-powder remaining for the bulls, the frenzied retail speculation has further increased the risks of a positioning squeeze for gold bugs.

Gold levels

The daily chart above shows that the price has met a 38.2% Fibonacci retracement of the prior impulse.

On the 4HR time frame, if price breaks lower, it would confirm the head and shoulders with conviction towards an extension of the Fibonacci retracement to a 61.8% target with the confluence of the prior structure.