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Gold Prices Hit Four-Month High as US Dollar, Bond yields Retreat

Gold Prices Hit Four-Month High as US Dollar, Bond yields Retreat

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices extended higher after breaching a psychological resistance level at $ 1,900/oz
  • The US Dollar and the 10-year yield retreated despite higher core PCE inflation data, buoying gold prices
  • The world’s largest gold ETF saw decelerating inflows last week, pointing to profit-taking

Gold prices edged higher during Monday’s Asia-Pacific trade, reaching above the $1900/oz figure to probe near the four-month high of $ 1,912.76 recorded last week before pulling back slightly. A higher-than-expected US core PCE inflation reading strengthened the price growth outlook and boosted the appeal of the precious metal, which is commonly viewed as a store of value and hedge against inflation. The core PCE data came in at 3.1%, compared to a baseline forecast of 2.9%. This also marked its highest reading seen since 1992, underscoring rising price levels as the economic recovery gathers pace.

The market doesn’t seem to be too concerned about this however, as the 10-year Treasury yield pulled back alongside the DXY US Dollar index. Investors probably shrugged off the data as Fed officials preempted that a “transitory” spike up in price levels may not warrant an immediate shift in the central bank’s accommodative policy stance. The real yield, as represented by the 10-year inflation-indexed security, declined 2bps to -0.86% on Friday and stayed largely unchanged on Monday. Falling real yields provided an additional pillar of support to bullion prices. Their negative relationship over the past 12 months can be visualized on the chart below.

Gold Price vs. US 10-Year Inflation-Indexed Security – 12 Months

Gold Prices Hit Four-Month High as US Dollar, Bond yields Retreat

Source: Bloomberg, DailyFX

Meanwhile, lingering pandemic concerns are boosting demand for safety across the Asia-Pacific region. Part of China’s Guangzhou city has been put under lockdown over the weekend after a new coronavirus outbreak was found there. Malaysia will enter a “total lockdown” from June 1st to 14th amid rising infections across the country. The return of Chinese and Indian buyers may provide further support to gold prices.

This week, Euro area core inflation and US nonfarm payrolls data will be closely monitored by traders for clues about rising prices levels and the health of the US labor market. The nonfarm payrolls number is expected to rebound to 650k after a much poorer-than-expected reading of 266k in April. A large deviation from the baseline forecast could lead to heightened market volatility, especially for the US Dollar, gold, yields and stocks.

The world’s largest gold ETF - SPDR Gold Trust (GLD) – saw four consecutive weeks of net inflow in May. The pace of inflow has decelerated last week however, suggesting that more investors are probably looking to take profit as gold prices approached a key chart resistance. The number of GLD shares outstanding increased 0.1 million last week, after climbing 5.0 and 1.1 million in the prior two weeks respectively. Gold prices and the number of outstanding GLD shares have exhibited a strong positive correlation in the past (chart below). Therefore, a slower pace of net inflow to the ETF may signal price weakness in the days to come.

Gold Price vs. GLD ETF Shares Outstanding – 12 Months

Gold Prices Hit Four-Month High as US Dollar, Bond yields Retreat

Source: Bloomberg, DailyFX

Technically, gold prices extended higher within an “Ascending Channel” after completing a “Double Bottom” chart pattern. Prices breached above a key resistance level at $ 1,875 (the 50% Fibonacci retracement) and have likely opened the door for further upside potential with an eye on $ 1,922 (the 61.8% Fibonacci retracement). XAU/USD stretched above the ceiling, showing signs of being temporarily overbought. Therefore, a technical pullback is possible if gold fails to breach above $ 1,922.

Gold PriceDaily Chart

Gold Prices Hit Four-Month High as US Dollar, Bond yields Retreat

Chart by TradingView

--- 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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