Stronger Yields Could Erode Gold Prices

As the US economic continues to gain traction, yields will begin to rise which should benefit the US dollar.  Since gold prices are quoted in dollars, it is treated by the investor community as a currency pair that weakens as the dollar rallies. As US yields climb the attractiveness of the dollar, which will erode the value of gold prices, pushing them lower relative to the greenback.

The SPDR Gold trust ETF (GLD) holds gold futures and therefore is a robust proxy for the price of the yellow metal.  Prices broke through long term support and are trading within a 6-month trend channel.  2014 has seen a retracement from the recent lows, as prices move toward the top end of the range which is capped by a downward sloping trend line that connects the highs in August to the highs in October and comes in near 124.40.  This level coincides with the 100-day moving average.  Support on the ETF is seen near the 50-day moving average near 119.50.

Momentum is flatand the trajectory of the MACD is flat.  The RSI is moving higher with price action, printing near 57, which is the upper end of the neutral range. 

Implied volatility (IV) for the GLD is a relatively inexpensive at 13%, in a 52-week range that has seen implied volatility peak near 35%, and a floor near 10%.

Implied volatility (IV) is the markets estimate of how much a security will move over a certain period on an annualized basis.  IV is a key component in the pricing of options as it reflects the chance that the option will be in the money by the expiration date of the option. 

Prices are now at the top end of the current range and are likely to consolidate until the US exhibits stronger growth.  The back up in yields will push gold prices through the bottom end of the range generating further liquidation.