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Gold Prices Fall as USD and Yields Creep Higher Before Inflation Data

Gold Prices Fall as USD and Yields Creep Higher Before Inflation Data

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices pulled back from a three-month high as investors mulled inflation fears
  • A stronger US Dollar and higher yields weighed on precious metal prices
  • Gold may see a near-term pullback as prices hit the ceiling of an “Ascending Channel”

Gold prices pulled back modestly during Wednesday’s Asia-Pacific trade, falling from a three-month high. A rising US Dollar and higher yields exerted downward pressure on the precious metal ahead of a key US inflation gauge today. Silver was down over 1% and platinum dropped nearly 0.8%. Risk sentiment tilted to the cautious side as inflation fears pulled Asia-Pacific equities broadly lower.

The recent rise in base metal, energy and agriculture prices has led to higher inflation expectations, which have boosted the appeal of gold as a perceived inflation hedge. From the March 30th to yesterday’s closing, gold prices gained almost 10%. A weakening US Dollar also contributed to the rise of commodities in general. The DXY US Dollar index has fallen 3.36% since the end of March.

This week however, reflation optimism boosted nominal and real yields, with the 10-year US Treasury yield climbing for a fourth day. The real yield, as represented by the 10-year inflation-indexed security, rose 2 bp to -0.91% from -0.93% seen on Monday. Higher real yields are negative for gold, as the opportunity cost of holding the non-interest-bearing metal increases (chart below).

Several Fed officials said on Tuesday that current conditions are not warranting a discussion about tapering even though the US economy is faring well. Their dovish stance failed to lift market confidence however and equities suffered broad-based selling across the globe.

Forex and equity traders are eyeing Wednesday’s US headline inflation and core readings for a reality check. The market has already set high expectations for the (YoY) increase in the price levels, with the headline rate figure to hit a 10-year high of 3.6%. If the actual readingsdeviate too far from the expectations, bullion prices could face another wave of volatility.

Gold Prices vs. US 10-Year Inflation-Index Security

Gold Prices Fall as USD and Yields Creep Higher Before Inflation Data

Source: Bloomberg, DailyFX

Technically, gold remains in an “Ascending Channel” as highlighted on the chart below. An upward channel is formed by consecutive higher highs and higher lows and can be easily recognizable as a trending market. The ceiling of the channel serves as an immediate resistance, and a pullback was observed after prices hit it. An immediate support level can be found at 1,800 – a psychological level.

The 20-day SMA line is about to cross above the 100-day line, potentially forming a “Golden Cross” on the daily chart. A “Golden Cross” is a medium-term bullish indicator and may pave the way for further upside potential. The MACD indicator is trending higher above the neutral midpoint, suggesting that bullish momentum is prevailing.

Gold PriceDaily Chart

Gold Prices Fall as USD and Yields Creep Higher Before Inflation Data

--- 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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