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  • Gold is back to trading flat on the day despite higher real yields, lower inflation expectations and a stronger USD.
  • Some analysts are arguing that Bitcoin’s roughly 20% drop might also be coming to the aid of the precious metal.

Spot gold (XAU/USD) hit its lowest levels in over one month during Monday’s Asia Pacific session, slipping below the $1820 mark for the first time since 2 December 2020. However, support in the $1820s (the 7, 9, 11 and 14 December lows) proved formidable and, also aided by the support provided by the 200-day moving average at $1836.627, spot gold has since rebounded back towards the $1850 mark and now traders largely flat on the day.

Gold flat despite fundamental headwinds

Gold is flat despite a much stronger US dollar on the day (the Dollar Index is up around 35 points or 0.4% to around the 90.50 area), which would typically be negative for gold. Moreover, gold has managed to recover from lows despite a continued rally in real US bond yields and a drop in inflation expectations; the 10-year TIPS yield is up 4bps to just under -0.92% and 10-year break-even inflation expectations are down to below 2.02% from above 2.07% last Friday.

Both of these factors would typically be negative for gold; the precious metal is typically seen as a hedge against inflation (so when inflation expectations drop this is normally bad for gold) and when real yields rise, this typically reduces the incentive to hold gold over fixed income (and is a negative for gold).

Other factors that traders are citing as to why XAU/USD is off lows include; profit-taking on short-positions after last Friday’s big sell-off and downside in Bitcoin painting the precious metal in a more favourable light.

On the latter, Bitcoin saw a staggering rally throughout last week to above $40K per coin at one point but has dropped roughly 20% on Monday. Driving the recent upside has been the notion that financial institutions will increasingly adopt cryptocurrencies into their portfolios and that companies will add Bitcoin to their balance sheets. Cryptocurrencies such as Bitcoin also hold important advantages over fiat currencies, as does gold, in that no one authority controls the supply of the currency (or commodity) and are seen by some as an alternative way to hedge inflation.

Thus, it has been argued that cryptocurrencies such as Bitcoin have diverted “inflation hedging” demand that would usually have gone to gold away and the recent surge in crypto prices had actually been weighing on gold. By that same argument then, downside in Bitcoin on Monday might be coming to gold’s aid.