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Gold Price Analysis: XAU/USD trades as a function of yields, bounces at $1730 support

  • Gold has seen choppy price action, dropping from the upper-$1750s to lows around $1730 back to the mid-$1740s again.
  • The correlation between gold, the US dollar and bond yields was tight on Friday, with yields leading the dance.

Spot gold (XAU/USD) prices have seen choppy price action this Friday, dropping from Asia Pacific levels in the upper-$1750s to lows around $1730, before recovering back to the mid-$1740s in recent trade. The precious metal seemingly found support amid buying interest at the Wednesday low/ahead of the 21-day moving average, which currently resides at $1728.75. Near-term gold bulls will now be eyeing a move back to recent highs just under the $1760 mark and perhaps a test of the 50-day moving average at $1762. Alternatively, a break below support around $1730 would open the door to a move towards support around $1720 and then perhaps down towards the end-of-March lows around $1680.

Driving the day

The correlation between gold, the US dollar and bond yields was tight on Friday, with each asset class moving in tandem. As is most often the case, US government bond yields seemingly led this particular dance; as the 10-year yields topped out above 1.68%, the DXY hit highs around 92.40 and gold hit lows just above $1730. Now that yields have dropped (and the 10-year is back under 1.65%), the DXY has dropped back under 92.20 and gold has recovered to the mid-$1740s. Choppy bond market action appeared not to have been linked to any particular fundamental catalysts.

Not that there isn’t plenty for dollar, bond and precious metals traders to think about right now. The risks posed by the worsening state of the global pandemic (think the rise in infections in India, Brazil, developed Asia and Europe in lockdown) seem to be capping the rise in yields right now, even though the long-term economic outlook remains as strong as ever. The US economic outlook is particularly strong and if bond market traders refocus on this, then there could be more upside for yields coming, though the threat of another rise in Covid-19 infections in the US is an obstacle.

Then there is inflation; the US March PPI report on Friday was hot. Most desks agree that this adds upside risks to next week’s CPI inflation report. The Fed thinks that this increase in inflation is going to be transitory (i.e. die down by the end of the year) and it appears the market agrees with them, otherwise yields (on nominal bonds, anyway) would be higher. The question as to whether the increase in inflation is transitory or not will be a key theme for markets this year; any indications that inflation is persistently high and making the Fed uncomfortable will trigger a hawkish shift in the market’s expectations for Fed policy and this could hurt gold. A hot CPI report next week will not be enough to cause this on its own, however.

 

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