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Gold remains under heavy pressure as bond yields across the maturity curve climb to their highest levels in 20 years. One market strategist warns that the precious metal still has room to fall as rising yields increase the opportunity cost of holding it.

Fawad Razaqzada, Market Analyst at FOREX.com, said in his latest precious metals note that a rally could remain difficult. Elevated oil prices are driving inflation pressures higher and fueling expectations that the Federal Reserve may need to raise interest rates beyond current projections.

According to the CME FedWatch Tool, markets see a 56% chance that the central bank will deliver a 50 basis point rate hike in December. Those expectations have pushed the U.S. 10 year Treasury yield to 5.15%.

Razaqzada tied gold’s weakness directly to the bond market slump. “One of the main reasons why gold and other low- and zero-yielding assets have come under pressure is due to the fact bond markets are slumping.”

“We have seen the US 10-year yields soar above 5.0% and 30-year yields are testing the 2007 highs,” he said. The sharp move in yields has created a difficult environment for assets that do not provide income.

“Gold typically goes up when yields go down as opportunity cost of holding the zero-yielding asset decreases. And when yields rise, gold typically heads lower for the same reason.”

The fundamental pressure is being compounded by an increasingly bearish technical picture. Razaqzada said traders who established long positions during the August rally are now stuck as the market continues moving against them.

“Some of traders will have their stops resting below recent lows near $4235. That’s precisely where I think gold is heading to next,” he said.

The analyst said the market has remained within a broader consolidation and bearish trend since reaching its peak in January. The continued pattern of lower highs and lower lows has yet to be broken, leaving the bearish structure intact.

“Gold has been effectively in a larger consolidation/bearish trend since peaked back in January. The series of lower highs and lower lows have not yet been violated to suggest the trend has turned bullish again.”

That leaves gold exposed to additional selling from traders holding long positions. Razaqzada warned that the scale of future liquidation could be substantially greater than what the market has experienced so far.

“Thus, the bigger risk is that we could see further long side liquidation, perhaps much larger than we so far have. If gold continues to head lower from current levels, and goes on to eventually break below support at $4235, then that could pave the way for a continuation towards $4,100 initially, ahead of $4,000 next.”

Despite the growing downside risks, Razaqzada acknowledged that sentiment remains extremely fluid and could reverse quickly. A loss of investor confidence in the Federal Reserve or its ability to control inflation and yields could alter the outlook for several assets.

“If investors lose faith in the Fed and its ability to control inflation or yields, then the dollar debasement trade could resurface and that could be positive for gold, silver and bitcoin , as well as currencies of countries with better fiscal discipline,” he said.

For now, however, the analyst sees firm technical barriers standing in the way of a bullish reversal. Gold would need to move through multiple resistance levels before he would consider abandoning his bearish forecast.

“On the upside, key resistance is now seen around $4,300-$4325 area, followed by $4,400. As a minimum, I’d like to see gold break above the $4,400 level on a closing basis before I can drop my bearish gold forecast.”

The combination of elevated Treasury yields, persistent inflation concerns and an unbroken bearish price pattern continues to weigh on the market. Unless gold can close above $4,400, Razaqzada’s forecast remains tilted toward further losses and a possible test of progressively lower support.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.