The best rally in Treasury yields in 13 years, the US dollar near 20-year highs, and the saddest start to the year for the S&P 500 since 1939. What could be worse for gold? The precious metal got into a serious wave of sales, collapsing 7% from the levels of April highs.

When gold rushed to update all-time highs after the outbreak of the armed conflict in Ukraine, the market was talking about high demand for safe-haven assets and accelerating inflation due to rising commodity prices. As a result, US inflation expectations outpaced Treasury yields, driving down real debt rates and supporting XAUUSD bulls. Much has changed since the second half of April.

The outbreak of COVID-19 in China and the realization that ousting Russia from the oil and gas markets will not be so easy, led to a decrease in oil prices and other commodity market assets. When the economy of the largest consumer slows down, global demand problems push the cost of raw materials down. At the same time, the EU's difficult choice between sanctions on Moscow and a recession due to the refusal of Russian energy carriers does not allow Brent and WTI to grow strongly. As a result, inflation expectations began to lag behind the yield of US Treasury bonds, which essentially broke the upward trend for the precious metal.

The rally in US debt rates is due to the aggressive "hawkish" rhetoric of FOMC members. Investors are confident that the Fed will raise borrowing costs by 50 basis points at its May 3–4 meeting and start rolling up its balance sheet, selling $95 billion in assets a month. Futures markets are signaling a big 50 bp move will be done in June and then in July or September. All this together allows us to speak of the most aggressive monetary restriction since at least 1994. Then the Fed, led by Alan Greenspan, raised the federal funds rate by 75 bp at one of the FOMC meetings. Such a possibility is not ruled out even now.

A meteoric rally in Treasury yields and the S&P 500's worst monthly performance since October 2008 have sharply boosted the US dollar's attractiveness, which is bad news for US dollar-denominated gold. At the same time, net-longs of speculators do not look overly stretched, which indicates the undiscovered upside potential of the USD index.

Dynamics of speculative positions in the US dollar and other currencies

It is curious that during the previous cycle of tightening of the Fed's monetary policy in 2015–2017, one pattern took place. The precious metal fell on the eve of the FOMC meetings, at which the rate was supposed to be raised, and then quickly regained lost ground and grew. Perhaps something similar should be expected now?

The Broadening Wedge pattern worked out technically well: a pullback to 23.6% and 38.2% after the formation of point 5 allowed us to form short positions from the area of $1900–1910 per ounce. Gold falling below $1860 and $1845 will provide an opportunity to build shorts with targets at $1805 and $1795.

Gold, Daily chart