- Gold spot prices have moved sideways in recent trade just below $ 1,880.
- The precious metal has been caught between the conflicting forces of the falling USD and the rise in real US interest rates.
Spot Gold (XAU / USD) has stabilized in recent trade just below the $ 1,880 level, with the precious metal caught between the conflicting forces of the falling USD and the rise in real US interest rates. XAU / USD is trading down by about 0.2% or just over $ 4 on the day.
Gold caught between conflicting forces …
Two of gold’s key drivers have been moving in the opposite direction from each other in recent trade; The Dollar Index (DXY) has fallen roughly 100 points from Monday’s European session highs just above 91.00 to just above 90.00, just above last Friday’s closing levels of 89.90. Meanwhile, the US 10-year TIPS yield has moved significantly higher from the European session lows of just under -1.08% and is now trading around -1.02%.
Keep in mind that spot gold generally has a negative correlation with the USD, so when DXY weakens, that is usually positive for gold and has a negative correlation with the real interest rate, so when (for example) 10-year TIPS yield rises, gold generally falls. Given the price action during the US session on Monday (rising real yields and falling USD), gold has subsequently been caught amid conflicting forces.
What’s next for gold?
The recent slowdown in USD strength and the rise in US real yields (which has followed an increase in nominal returns) reflects a slowdown in the rather severe risk reduction movement observed during the Asian morning session. Pacific and Europe amid concerns over news coming out of the UK about a new, more contagious and rapidly spreading strain of Covid-19 that has prompted closures in the country and an international ban on passengers arriving from the UK.
No particular issue has been behind the relaxation; Perhaps the USD will take advantage of a significant intraday rally to fall short amid what appears to be a structurally bearish market for the USD. In fact, this weekend’s Covid-19 news is not a game changer for the narrative that 2021 and beyond will see a robust recovery as the global economy moves toward herd immunity to Covid-19. through vaccination programs (scientists believe the vaccine will continue to work against the new UK strain) and as the Biden Administration spearheads a return to ‘normalcy’ regarding global trade, all of which should be dollar negative Americans. If that’s the case, that could be bullish for gold.
Meanwhile, as Congress moves closer to a deal on more fiscal stimulus, it appears that some of the safe-haven supply in the US bond markets has been undone. But going forward, US real rates are likely to remain quite low; the Fed wanted to emphasize that its ultra-accommodative policy stance is going nowhere soon at its policy meeting last week and is likely to intervene through more QE if yields start to rise too quickly. Even if yields rise based on the additional issuance of US government debt to fund the next round of Covid-19 fiscal stimulus that is currently being ratified, it is likely that all of the stimulus affecting the economy as much of the Fed and the government further boost inflation expectations. that will keep real returns suppressed. If the performance of the US 10-year TIPS stays below -1.0% in the next few weeks / months, or perhaps moves even lower to test the 2020 low around -1.1%, this would be bullish for gold.
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