China acted as a dam in the path of gold's decline. However, at the turn of September and October, this dam collapsed. Neither massive purchases of the precious metal by the People's Bank of China nor the highest demand for physical gold within the country could hold back the "bears" on XAU/USD for long. The rally in U.S. Treasury yields was just too sharp. It climbed too high.

The price of the precious metal is not determined by inflation or GDP. It depends on the cost of money. The higher the interest rates, the less demand there is for gold. It doesn't generate interest income and can't compete with the rapidly rising rates in the debt market or a strong U.S. dollar.

If in 2022 to early 2023, the rise in Treasury yields was driven by expectations of the Fed continuing its monetary policy tightening cycle, then in the summer and autumn, the stability of the U.S. economy in the face of aggressive monetary restriction, massive debt issuance by the Treasury due to a huge budget deficit, and the selling of securities by non-residents came into play. In other words, buyers are demanding lower prices, and asset managers see no need to hold onto bonds.

Dynamics of yields, issues, and portfolios of U.S. bonds

Interestingly, the same factors causing XAU/USD to fall are behind the rally in U.S. bond yields. Investor concerns about a recession have given way to expectations of a soft landing for the American economy, which is bad news for gold as a safe-haven asset. Simultaneously, a strong labor market prevents the Fed from contemplating rate cuts. Rumors of a dovish pivot pushed gold above $2,000 an ounce this year. However, once it became clear that there would be no loosening of monetary policy, at least until mid-2024, the precious metal found itself in a difficult position.

It's worth noting that the 10-year U.S. Treasury yields, which have reached their highest levels since 2007, are starting to violate the principles of intermarket analysis. There is a divergence in their dynamics and in the copper-to-gold ratio.

Dynamics of bond yields and the ratio of copper and gold

Fans of debt obligations argue that they are fundamentally undervalued. They point out that the rally in yields is driven by Treasury issuances and a massive budget deficit. However, the issue may be in the excessively high price of the precious metal. For a long time, it stayed afloat, thanks to China. However, China is not all-powerful. Its dam has collapsed, and XAU/USD quotes have plummeted.

Thus, the unfavorable conditions in the currency and debt markets are causing gold to decline. Only disappointing U.S. employment statistics for September can halt the sell-off.

Technically, on the daily chart of the precious metal, pin bar and 1-2-3 patterns have been precisely worked out. This allowed us to establish short positions on the break of the pivot level at $1,895 per ounce. When gold returns to $1,833, we will close out the remaining part of the profit and reverse our positions.