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Gold Prices Extend Higher on Chinese Demand Boost, Falling Yields

Gold Prices Extend Higher on Chinese Demand Boost, Falling Yields

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices edged higher as the 10-year Treasury yield fell to a five-week low
  • China allowed commercial banks to import a large amount of gold to meet domestic demand
  • Gold prices have likely formed a “Double Bottom” chart pattern, pointing to further gains

Gold prices extended higher during Monday’s APAC hours as falling yields and the prospect of rising Chinese demand boosted the appeal of the precious metal. Gold prices have already climbed 2.29% over the last two trading sessions, propelled by a weaker US Dollar and sliding yields. Prices have surged above the trend-defining 50-day SMA line and have potentially opened the door for further gains.

The People’s Bank of China (PBOC) was reported to have allowed domestic and international commercial banks to import a large amount of gold to meet domestic demand. Physical gold consumption may get a boost during the upcoming “Golden Week” holiday as weddings and tourism activity drive a demand boom. According to Reuters, about 150 tons of gold worth $8.5 billion at current prices is likely to be shipped following the green light from Beijing.

China is the world’s biggest gold consumer, and the amount of gold it imports has plunged since the onset of the coronavirus outbreak in early 2020 (chart below). A permission from policymakers to allow the commercial banks to import more gold would signal a return of Chinese buyers to the global bullion market, potentially driving prices higher.

Gold Prices Extend Higher on Chinese Demand Boost, Falling Yields

Source: Bloomberg, DailyFX

Meanwhile, the US 10-year Treasury yield fell to its lowest level seen in five weeks as inflation fear abated. The real yield (nominal yield – inflation), as represented by the 10-year inflation-indexed security, fell 2bps to -0.81% on Monday (chart below). Falling real yields make the yellow metal more attractive as an investment asset as the opportunity cost of holding it declines.

Looking ahead, Thursday’s ECB interest rate decision and US weekly jobless claims data are among the key event risks this week. A slew of Markit manufacturing PMI data from Europe and the US will also be closely monitored by gold traders. Find out more from the DailyFX economic calendar.

Gold Prices vs. 10-Year Treasury Inflation-Indexed Security

Gold Prices Extend Higher on Chinese Demand Boost, Falling Yields

Source: Bloomberg, DailyFX

Technically, gold has likely formed a “Double Bottom” chart pattern after hitting US$ 1,677 twice. The “Double Bottom” pattern usually appears at the end of a downtrend and signals potential trend reversal. Prices extended higher and breached the 23.6% Fibonacci retracement level (1,744), opening the room for further upside potential with an eye on US$ 1,785 – the 38.2% Fibonacci retracement. The MACD indicator is trending higher above the neutral midpoint, underscoring bullish momentum.

Gold PriceDaily Chart

Gold Prices Extend Higher on Chinese Demand Boost, Falling Yields

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

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

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