Gold Price Slides as the US Dollar and Treasury Yields Rise. Where to for XAU/USD?

2023-08-18 00:30:00

Daniel McCarthy, Strategist

The gold price struggles continue with the US Dollar regaining the ascendency
Treasury yields are on the march higher with the source of selling pressure on watch
Volatility is inching higher off a low base. If it spikes, will that send XAU/USD lower?

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The gold price is under the pump again going into Friday's trading session with the US Dollar continuing to be underpinned by rising Treasury yields.

The DXY (USD) index traded at its highest level since early June overnight while spot gold traded at its lowest level since March after touching US$ 1885 oz.

The surge in Treasury yields saw the benchmark 10-year bond trade at 4.328% in the North American session. That was just a fraction below the 4.335% seen in October last year, which was the highest return on that note since 2007.

Potentially driving the Dollar higher could be the deterioration in the Chinese Yuan. The recent data on Treasury holdings revealed that China were again sellers of the bonds through June.

They have sold every month this year, except for March, a month that saw the Yuan rally significantly.

The domestic situation is presenting some challenges for authorities there, after Country Garden and Sino Ocean, two very large property developers, defaulted on several offshore and onshore bonds this month.

There are concerns that the situation in the property market might have further ramifications after Zhongrong International Trust Co., a major player in China’s trust sector, missed several obligations to its clients over the past week.

Then on Thursday, Evergrande, another large Chinese property company, filed for Chapter 15 protection in the US. Chapter 15 is similar to filing for Chapter 11, but for companies that have offshore interests as well as a US business.

Financial markets have historically exhibited nervousness if the concept of contagion becomes apparent.

Gold is sometimes seen as somewhat of a ‘haven’ in such circumstances but that has not been the case in this latest episode of markets schism. Treasuries are also seen as a risk-free asset and are sometimes sought after in times of upheaval.

Both of these assets have been moving lower in price and it might be the dynamic coming out of China that could be driving the price action.

With Treasury yields climbing, which sees the capital value slide lower, it could see investors avoid the non-yield bearing yellow metal.

The GVZ index is a measure of implied volatility for gold that is calculated in a similar way to the VIX index’s interpretation of volatility for the S&P 500.

This forward-looking gold volatility index has been languishing of late, but it has been ticking higher this week. This might indicate building uncertainty within the market and a significant move in price might be in the offing.

If the situation in China continues to unravel, authorities there might need more USD to sell to support the Yuan. This could see more interest for the Dollar in other markets, including XAU/USD. To learn more about how to trade gold, click on the banner below.