- Gold prices are being pressured around the psychological $1,800 level.
- The US dollar is earmarked by some analysts as a stronger for longer trade-off.
Update: Gold (XAU/USD) seesaws around $1,800, recently easing to $1,803, during the initial Asian session on Thursday. The yellow metal dropped the previous day even as the US Dollar Index (DXY) eased on the upbeat market sentiment. The greenback moves were largely affected by Wall Street’s another positive day, backed by strong earnings. The same optimism could be cited for the US Treasury yields positive run for the second day, which in turn seemed to have pressured the gold prices towards the south.
It should, however, be noted that multi-day high covid numbers from Australia, grim conditions elsewhere, joined uncertainty over the US President Joe Biden’s infrastructure spending passage to challenge the market optimism and gold bears as well.
Moving on, gold traders will keep their eyes on the risk catalysts ahead of the European Central Bank (ECB) Monetary policy meeting. Although policymakers are expected to reiterate the status-quo, dovish signs in the statement and press conference may favor USD and weigh on gold prices.
At the time of writing, XAU/USD is trading at $1,803.23 and down some 0.4% on the day after falling from a high of $1,813 to a low of $1,794.66.
The price of gold has rebounded from the lows as the safe-haven dollar pulls back from more than three-month highs, with risk appetite back up with stocks higher.
The S&P 500 is up 0.65% on earnings strength but investors remain cautious due to inflation fears and concerns about the highly contagious coronavirus variant.
In mid-day New York trading, the dollar index, a measure of its value against six major currencies was slightly lower by 0.19% at 92.788 DXY. The high on the day was 93.191. On Tuesday, the index hit a more than three-month high.
Investors remain cautious due to inflation delta which is supporting the greenback on the one hand.
On the other hand, high US inflation is keeping the door open for the Federal Reserve to taper stimulus which is pressuring gold prices as investors seek the carry opportunities elsewhere for which fruits gold does not bear.
”Money managers only marginally increased their gold length, despite sinking real yields in the US”, analysts at TD Securities explained.
”Indeed, gold prices are still struggling to firm, in spite of the extremely positive price action in real yields which sent US10y TIPS prices back towards their pandemic-era highs,” the analysts added.
”In contrast, the yellow metal can’t manage to break north of its 200dma. This highlights a sharp divergence in capital flows as high inflation prints have kept breakevens elevated, primarily as a function of carry.”
The dollar smile theory
The dollar smile theory could be significantly bearish for gold prices going forward.
As analysts at ANZ Bank explained, ”despite the vaccine rollout, markets do not appear to be embracing the idea of learning to live with COVID-19. Sentiment appears to have shifted, at least for the moment, to persuasion that growth and earnings expectations may be overdone.”
In this respect, the idea of a synchronous global recovery looks full of holes as it did back in January 2020, and the bond market is a good place to start looking for market sentiment.
US 10-year Treasury yields were back to about 1.12% this week before bouncing, to current levels in the highs near 1.3%.
The USD outperformed despite collapsing US yields. The dollar is strong on the basis of both risk-off flows and firm economic data, but more to the point, yields have fallen almost everywhere that matters, not just in the US.
This dynamic would likely persist or even accelerate as the coronavirus fears head towards an apex, whenever that might be, especially as investors continue to move away from EMs.
Real rates were crumbling as growth angst helps nominal yields collapse but as US yields are set to normalise, the negative correlation would be expected to adversely impact the yellow metal for longer.
”Here, gold prices are vulnerable to yet another pullback as gold’s persistent weakness against real yields points to a vulnerable microstructure. At the same time, gold’s inability to rally despite the ongoing risk-off highlights that speculative flows remain particularly weak, reinforcing the potential for a deeper pullback,” analysts at TD Securities explained.
Meanwhile, the number of new infections is rising in southeast Asia and most US states as well with the highly infectious Delta variant taking hold.
Yesterday, a new study found that some vaccines may be less effective against the Delta variant, Risk-off: bioRxiv study shows J&J vaccine may be less effective against Delta covid variant, and there lies within prospects for continuous risk-off for the foreseeable future.
The immediate concern for markets is whether we are going to see a slowdown in the global economic recovery.
This could be the overriding force that results in strong demand for the greenback, especially as all current data points to a hawkish theme at the Fed.
”Since the FOMC last met, the labour market, Retail Sales and inflation have all come in very strong. While the rise in COVID cases is a valid concern, there is a risk that the market is becoming too dovish on its expectations for the Fed’s communication…
Read More: XAU/USD remains indecisive around $1,800 amid pre-ECB trading lull