(Kitco News) Did gold find its bottom at 10-month lows this week? Analysts are waiting to see if the precious metal can maintain the $ 1,700 an ounce level and break free from Treasury market chains.
After falling to a low of $ 1,675 on Monday, April Comex gold futures recovered to over $ 1,730.
On Friday, gold fell that day, but managed to hit $ 1,700 an ounce ahead of higher Treasury yields. The bond market continued after US President Joe Biden signed his $ 1.9 trillion stimulus bill on Thursday. At the time of writing, April Comex gold futures were trading at $ 1,717.90, down 0.27% on that day.
“10-year yields are rising and the curve is getting sharper. Even the short end of the curve has sharpened. This could continue as we see good economic figures and talk about inflation. More risk appetite leads to higher yields, and it’s not a good story for gold, “TD Securities’ head of global strategy Bart Melek told Kitco News. “Precious metals are held hostage by Treasury markets.”
It’s all about yields
10-year US Treasury yields rose more than 1.6% overnight. “Yields are still at stake. I thought $ 1,675 might be the lowest in gold. But it all depends on yields and whether they will continue to grow,” said Daniel RJO Futures Senior Commodity Broker Daniel Pavilonis.
The $ 1.9 trillion stimulus package is also inflationary. “The market expects consumers to start coming out and buying goods with this money,” said Phoenix Futures and Options LLC President Kevin Grady.
Once everyone is vaccinated in the US, the yield curve will respond, and gold could struggle, Melek said.
Moreover, markets are beginning to appreciate in several incentives, including infrastructure spending.
“If the printing of money, higher yields and foreign buyers selling our debt is the new MO, there are several reasons to buy emerging markets right now. The stimulus is ultimately a signal to the rest of the world that we are not in good shape, and we are signaling to raise more money to save governments, “Pavilonis said.
Eyes on the Fed next week
The current correlation between yields and gold is that as yields increase, gold decreases. This may change in the future, and once that happens, gold may increase further, Pavilonis pointed out.
“Eventually, this correlation will break. The Federal Reserve admits we see inflation and we may have to raise rates sooner than expected to break this correlation. Or it just admits that rising yields are a concern. ” he said.
The Fed has largely ignored the issue so far, which is why all eyes will be on Fed Chairman Jerome Powell next week as he holds his press conference following the central bank’s interest rate announcement on Wednesday.
Even the European Central Bank (ECB) came out on Thursday saying it was worried about inflation and the printing of money, Pavilonis said. The ECB has said it will use its Pandemic Emergency Procurement Program (PEPP) to halt any unjustified increase in debt financing costs.
ECB President Christine Lagarde said “nonchalantly, higher returns can result in premature tightening of funding in all sectors of the economy,” Pavilonis described. She also noted that the ECB wants to maintain favorable financial conditions, with inflation looming along the way.
“If the Fed came out and said something similar, it would be optimistic about gold … The fact that yields are rising may show that the Fed is losing control,” Pavilonis said.
Melek said Powell is unlikely to make significant new comments about the yield curve. “Powell will assure us that it is too early to talk about rising interest rates. He was quite ambiguous the last time yields rose sharply and risk appetite was not affected,” he said.
Powell could try to “reduce yields,” Grady added.
Markets will also take a look at the Fed’s updated quarterly projections. And ING economists expect an upward revision of GDP in 2021.
“There will also be a lot of interest in the Dot Dot Fed fleet rate. The median Fed 2023 Dot Plot will change to a 25 bp increase? Probably not, but the dollar would probably rise if it did. However, a The FOMC statement was largely a press conference by Jay Powell, who reiterated that the Fed has a long way to go before the stimulus cut prevents the dollar from going too far, “economists said.
Price levels
It is critical to see how gold behaves next week at around $ 1,700 an ounce, according to analysts. A move to $ 1,760 would signal a possible rally, while a drop below $ 1,670 could open the door to $ 1,600 an ounce, they said.
“It’s possible that the gold will jump here and consolidate for a bigger move; you have to get over $ 1,760 to give confirmation,” Pavilonis said. “The $ 1,670 level is a support. If it shakes, we could look at $ 1,600.”
The gold will have to hold $ 1,700, said Charlie Nedoss, LaSalle Futures Group’s chief market strategist. “I want to see what he does at $ 1,700,” he said.
Melek added that short-term coverage is very likely in the short term. But if the US dollar and yields continue to rise, gold could re-test $ 1,660 an ounce next week.
Grady pointed out that it is dangerous to be short of gold now, while at the same time it is not beneficial to be long of gold. “Being short gold on the market, which has so much money to print and stimulus, is dangerous. But every time gold grows, it is sold. Traders want to show or tend and follow this trend,” he said. . “That’s why I’m neutral.”
Other data to follow
There will also be a list of new economic data to monitor next week. Data releases will begin with the NY Empire State production index on Monday and US retail and industrial production on Tuesday.
US housing starts and building permits are due on Wednesday, followed by the Philadelphia Fed’s manufacturing index and jobless claims on Thursday.
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