Gold’s Slump on Yields, Dollar Fires Warning at Everything Rally

(Bloomberg) -- Gold's sharp tumble is sounding a warning about potential vulnerabilities across markets.

Investors last year became used to everything from stocks and bonds to gold and digital coins delivering major gains. But 2021's rise in Treasury yields along with recent dollar strength threaten more losses for the yellow metal, and represent a mix that could test other assets too.

Gold slid as much as 1.7% on Monday after suffering its worst three-day decline through Friday since August. The technical picture for the metal is also worsening, as a Jan. 6 peak marks a potential so-called “double top” pattern that some strategists argue presages more losses.

“The metal is starting to look precarious,” said Rick Bensignor, president of Bensignor Investment Strategies in New York, adding gold's failure to move determinedly above $1,927 was a major miss from a technical standpoint.

Gold enjoyed its biggest annual gain in a decade last year as the Covid-19 pandemic devastated the global economy. Investors are now betting on economic recovery, pushing Treasury yields past 1% and bolstering the dollar after a prolonged period of greenback weakness. Such a backdrop could ripple across other markets if it's sustained.

While long-term macro trends point to a weaker dollar, “a reversal in real yields, and the positive effect that will have on” the greenback could have “huge implications for gold, copper and the reflation trade that is now so consensus,” Chris Weston, head of research at Pepperstone Group Ltd., wrote in a note.

For the yellow metal specifically, holdings in gold exchange-traded funds may offer a signal as to whether liquidation of long exposure is gathering pace. Should that theme develop in the days ahead, the $1,700 level -- which was the launchpad for the rally up to $2,000 in August -- may come back into focus.