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Gold, Silver Price Forecast: USD and Yields Turn Higher as Economic Data Improves

Gold, Silver Price Forecast: USD and Yields Turn Higher as Economic Data Improves

Daniela Sabin Hathorn, Analyst

GOLD Fundamental Forecast: Bearish

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Gold prices have been unable to hold ground and the commodity has faced two consecutive weeks of declines after an attempted break higher in mid-January.

USD PICKS UP MOMENTUM

A few factors are believed to be the key drives of gold weakness. Firstly, the US Dollar has been able to pick up bullish momentum as macroeconomic data for the US has been improving, with the US Dollar index setting a base on the 6th of January at 89.16, hindering USD-denominated commodities like gold and silver.

Fundamental factors aiding the US Dollar are the efficient vaccination rate the country is seeing, coupled with positive signs of cooperation coming out of US Congress with regards to further fiscal stimulus. The economic data has also been favorable, with ISM manufacturing and services data beating expectations, as well as a significant increase in ADP employment numbers on Wednesday. This better than expected reading was unfortunately not carried through to the NFP numbers released on Friday, with the actual figure falling 1k short of the 50k expected, and December figures revised downward to -227k from -140k.

The US Dollar returned some of the previous gains when the figures were released, but it doesn’t ultimately change the direction the currency is heading in. If anything, it makes the Biden administration’s case for a large amount of stimulus stronger. Gold and silver prices are likely to remain underpinned by US Dollar performance in the near future.

RISE IN BOND YIELDS OFFSET GOLD HEDGE

Bond yields have been creeping higher in recent weeks and the US 10-year yield is now above the January 11th peak, sitting comfortably around 1.15%. The increase in yields weighs negatively on gold, a non-yielding asset, and this may well continue to be the case if expectations of future economic performance increase. In a low-interest environment, gold tends to outperform as its opportunity cost is low because investors are not foregoing interest that would be otherwise earned in yielding assets, but increasing yields offset this setup.

Another factor to take into account is inflation expectations, as an increase in inflation is likely the biggest upside risk for gold this year. Real yields were at a low this summer, allowing gold to outperform other assets, with a subsequent correction as rates normalized towards the end of the year. Assuming that the Fed will not cut interest rates further and that investors will not expect a further slowing down of the economy, the room for further declines in the real interest rate is limited. Therefore, a continuation of this positive trend, at which point real yields may become positive again, is likely to keep the price of gold subdued in the near-term.

Although expectations are for inflation to increase this year on the back of built-up demand, gold traders need to be prepared for the continuation of an environment of low inflation in the near future.

XAU/USDDaily chart

XAU/USD Chart
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SILVER Fundamental Forecast: Neutral

An attempted short-squeeze in silver prices orchestrated by a swarm of retail traders grouped together on social networking platform Reddit saw the price of the precious metal just to $30 at the beginning of the week, but those gains have been fully given back. This leads us to believe that the bullish setup was a false breakout and more weakness can be expected before price becomes bullish again.

Fundamentally, silver faces the same issues as gold but the magnitude of its effect is thought to be lower, with many investors focusing solely on gold as a hedge against falling yields and market instability. A slip below the $26 mark could attract further selling pressure, although the 100-day SMA could act as support on the $25 line.

XAG/USD Daily Chart

XAG/USD Chart
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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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