Precious metals rose overnight as sticky gold demand around $1900-1925 proved to be a robust price plank.
The significant support around this critical technical level sent long-term strategic buyers into aggressive bargain-hunting mode even though US Treasury-10Y yields rose above .70 % overnight.
Gold put in a cautious, but strong-willed push higher fueled by a weaker US dollar. The USD retreated despite signs of ‘risk-off’ investor behaviour in most, but this proved favourable for gold.
With short-term speculative-positioning data showing an elevated amount of short dollar positions, gold’s appeal as an essential diversifier to compliment the negative medium-term US economic outlook remains intact as strategic investors continue to diversify and hedge for that eventuality.
And fortunately for gold investors, they have friends at the Fed as speakers unanimously reside incredibly cautious about the US economic recovery.
It has been a tumultuous week for the gold price, which is back to $1950 levels, having clawed back a good chunk of this week’s losses. The US dollar remains under pressure as investors are growing more sceptical of Congress’s willingness to pass a stimulus package.
Still, it could be a challenge for gold markets to regain last week’s fame as more fixed income traders are willing to short bonds now, which complicates the bullish gold view.
The question is whether the back up in yields is accommodation for this week 10-year and 25-year auction or a rethink on the curve.
We will find out soon, improving views on the vaccine front notwithstanding.
Because risk assets like stocks are moving in tandem with rates, financial conditions are holding up, so there is no reason for central banks to lean against the bond markets repricing.
I am not suggesting gold cannot move higher if US T-10Y back up to .85, it just means something other than actual yields will need to do the heavy lifting to push real yields lower.
Given that nominal yield correlations have diverged a bit from bullion on the recent move, gold traders may prefer to let this week’s dust settle and see where real yields pivot next week.
Gold markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp