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Gold Prices Fall on Hopes for Progress in Ukraine Talks, Rising Treasury Yields

Gold Prices Fall on Hopes for Progress in Ukraine Talks, Rising Treasury Yields

Margaret Yang, CFA, Strategist

GOLD PRICE OUTLOOK:

  • Gold prices pulled back for a second day on hopes for progress in Ukraine talks
  • US Treasury yields climbed as demand for safety ebbed, denting the appeal of the yellow metal
  • Gold ETFs saw large net inflows over the past few weeks, underpinning buying pressure

Gold prices extended lower during Monday’s APAC mid-day trading session as investors eyed Ukraine talks ahead of Wednesday’s FOMC meeting. Risk sentiment seems to be tilted to the positive side as US equity futures rebounded from Friday’s losses. Russian President Vladimir Putin said that there are “certain positive shifts” in negotiation with Ukraine on Friday, raising hopes that both sides are moving closer to reach a ceasefire agreement. This dented demand for safety, causing prices of gold and Treasuries to fall.

Falling Treasuries led yields higher, with 10-year Treasury rates gaining 4bps to 2.036% - a one month high. Rising yields make gold even less appealing to investors as the opportunity cost of holding it becomes higher. Looking ahead, Treasury yields may have more room to go up further due to rising inflation and monetary tightening. The Ukraine war boosted the price of crude oil, grain, natural gas and metals, sending a fresh wave of inflation around the globe. This may urge the Fed – the world’s most influential central bank – to ramp up rate hikes more aggressively. Even before the Ukraine war, US inflation has already hit 7.9% in February, the highest level in 40 years.

The market has fully priced in a 25bps rate hike this week, and traders are keen to learn how the Ukraine war will impact the Fed’s tightening trajectory going forward. There seem to be high expectations that the central bank will raise interest rates at every forthcoming FOMC meeting this year. This scenario would push the Fed’s target rate range to 1.75%-2.00% by the end of 2022. Against this backdrop, the non-interest-bearing precious metal may be under increasing pressure down the road.

Target Rate Probabilities for 16Mar 2022 Fed Meeting

Gold Prices Fall on Hopes for Progress in Ukraine Talks, Rising Treasury Yields

Source: CME

On the flipside however, rising inflation may buoy gold prices and limit downside potential as the yellow metal is widely perceived as a store of value and hedge against such risks. Besides, the ongoing conflict between Russia and Western powers over Ukraine may also keep gold afloat in the weeks to come.

The world’s largest gold ETF - SPDR Gold Trust (GLD) – saw large among of net inflow over the last three weeks (chart below). This suggests that more buyers are purchasing bullion amid rising geopolitical unrest. The number of GLD shares outstanding increased 12.2 million month-to-date, with the number of holdings hitting the highest level in 12 months. An accelerated pace of subscription to the ETF may be viewed as a bullish signal for prices.

Gold Price vs. GLD ETF Shares Outstanding

Gold Prices Fall on Hopes for Progress in Ukraine Talks, Rising Treasury Yields

Source: Bloomberg, DailyFX

Technically, gold prices pulled back from a 19-month high last week and extended lower, entering a technical correction. An immediate resistance level can be found at around 1954, the 127.2% Fibonacci extension. Breaching below this level may lead to a test of 1913 for support. The MACD indicator is about to form a bearish crossover above the neutral midpoint, suggesting that bullish momentum is ebbing.

Gold - Daily Chart

Gold Prices Fall on Hopes for Progress in Ukraine Talks, Rising Treasury Yields

Chart created with 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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