Spot gold (XAU/USD) prices broke below a key area of support in recent trade, tumbling beneath both the 200 and 50-day moving averages, both of which sit close to $1790. As of right now, prices have recovered a little and XAU/USD is trading around $1790, meaning prices are down about 0.8% on the day. This follows Monday’s steep 2.2% decline and means dollar-denominated gold has lost nearly $60 in value so far this week.

Traders will remember that the bulk of the decline was triggered on Tuesday as markets reacted hawkishly to the news of Jerome Powell’s renomination as Chairman of the Fed for a second term. The hawkish reaction was a result of market participants unwinding bets that Lael Brainard would be announced as the new Chair, potentially heralding in a more dovish policy lean. As it happened, Lael Brainard was picked as the new Vice Chair of the Fed, and will replace Richard Clarida in the role in February. Real US government bond yields saw a sharp rise on Monday and this, coupled with a  decline in inflation expectations, was the main driver of gold’s decline at the time. Real yields have continued to rally on Tuesday as markets price in a more hawkish Fed policy stance in 2022. December 2022 three-month eurodollar futures (a proxy for where markets expect the Federal funds rate to be next December) has dropped about 10 points this week to 98.95, its lowest level yet this year. In other words, markets now price in about 80bps worth of tightening over the course of 2022, the most hawkish that expectations have been since the onset of the pandemic.

The 5-year US TIPS yield is up another 2bps on Tuesday at -1.66%, after surging more than 12bps on Monday. The 10-year US TIPS yield is up a further 3bps and back to the north of -1.0% after Monday’s 10bps rally. The move higher in US TIPS yields (and lower in prices) reflects a lower demand for protection against inflation (TIPS are indexed to CPI). A reduced appetite for inflation, as markets bet that a Powell-led Fed is more likely to fulfill its medium-term inflation remit, also weighs on gold, as has been seen.

In terms of what's next for gold, the focus is firmly on the December Fed meeting and any indications that recent chatter amongst Fed officials about accelerating the pace of QE taper in January translates into a broader consensus. Any decision to accelerate QE tapering would likely accelerate the recent upside seen in real yields, which would be bad for precious metals. In the meantime, as long as the dollar remains bid and yields buoyant, gold will remain suppressed, with the bears perhaps targetting support at the $1760 area to the downside.