Can the price of gold break free from the treasury markets? Analysts focus on this trigger

(Kitco News) Did gold find its lowest at this week’s 10-month low? Analysts are waiting to see if the precious metal can maintain the level of $ 1,700 an ounce and break free from the shackles of Treasury markets.

After dropping to a low of $ 1,675 on Monday, April’s Comex gold futures recovered above $ 1,730.

Gold was lower that day on Friday, but was able to hold the level of $ 1,700 an ounce amid rising Treasury yields. The bond market liquidation continued after US President Joe Biden signed his $ 1.9 trillion stimulus bill on Thursday. At the time of writing, April’s Comex gold futures were trading at $ 1,717.90, down 0.27% on the day.

“10-year yields are rising and the curve steepens further. Even the short end of the curve has steepened. This could continue if we see good economic numbers and talk about inflation. An increased risk appetite is driving. to higher yields., and that’s not a good story for gold, “Bart Melek, head of global strategy at TD Securities, told Kitco News.” Precious metals are being held hostage by the Treasury markets. “

All about returns

Yields on 10-year US Treasuries jumped above 1.6% overnight. “Yields are always on the line. We thought $ 1,675 might be the lowest in gold. But it all depends on yields and if they keep rising,” said Daniel Pavilonis, commodities broker at RJO. Futures.

The $ 1.9 trillion stimulus package is also inflationary. “The market expects consumers to start going out and buying products with this money,” noted Kevin Grady, president of Phoenix Futures and Options LLC.

Once everyone is vaccinated in the United States, the yield curve will react and gold could struggle, Melek noted.

Additionally, markets are starting to charge for more stimulus, including infrastructure spending.

“If money printing, higher yields and the foreign buyers who sell our debt are the new MO, there is more reason to buy emerging markets now. The stimulus is ultimately a signal to the rest. world that we are not in good shape, and we are signaling to pump more money to bail out governments, ”Pavilonis said.

Eyes on the Fed next week

The current correlation between returns and gold is that when returns go up, gold goes down. That may change in the future, and once it does, gold may soar, Pavilonis pointed out.

“Eventually that correlation will break. The Federal Reserve admitting that we are seeing inflation and that we may need to raise rates sooner than expected would break that correlation. Or even just admit that rising yields are a concern. . It would be bullish for gold, “he said.

The Fed has largely ignored the issue so far, which is why all eyes will be on Fed Chairman Jerome Powell next week as he holds his press conference following the interest rate announcement. from the central bank on Wednesday.

Even the European Central Bank (ECB) came out on Thursday saying it was concerned about inflation and printing money, Pavilonis noted. The ECB has said it will use its Pandemic Emergency Purchase Program (PEPP) to stop any unwarranted increases in debt financing costs.

ECB President Christine Lagarde “casually stated that higher yields could translate into premature funding crunch in all sectors of the economy,” Pavilonis said. She also noted that the ECB wishes to preserve favorable financing conditions with looming inflation.

“If the Fed came out and said something similar, it would be bullish for gold… The fact that yields are going up maybe shows that the Fed is losing control,” Pavilonis said.

Melek said Powell was unlikely to make any significant new comments on the yield curve. “Powell will assure us that it is too early to talk about raising interest rates. It was quite ambiguous the last time around when rates rose sharply and risk appetite was not touched,” did he declare.

Powell could try to “reduce yields,” Grady added.

Additionally, markets will get a sneak peek at the Fed’s updated quarterly forecast. And ING economists expect an upward revision of GDP in 2021.

“There will also be a lot of interest in Fed Funds rate dot plots. Does the 2023 Fed Dot Plot median rise 25 bps? Probably not, but the dollar would likely recover if it was. Yet a largely unchanged FOMC statement and Jay Powell press conference reiterating that the Fed still has a long way to go before reducing stimulus measures should prevent the dollar from going too far. ” , said economists.

Price levels

It is critical to see how gold performs next week around the $ 1,700 an ounce level, analysts say. A move towards $ 1,760 would signal a possible rally to come, while a dip below $ 1,670 could open the door to $ 1,600 an ounce, they said.

“Gold may rebound here and consolidate for a higher move; you have to go above $ 1,760 to confirm,” Pavilonis said. “The $ 1,670 level is support. If that wears off, we could look at $ 1,600.”

The gold will need to hold $ 1,700, said Charlie Nedoss, senior market strategist at LaSalle Futures Group. “I want to see what he’s doing at $ 1,700,” he said.

Melek added that short-term hedging is very likely in the short term. But if the US dollar and yields continue to rise, gold could retest $ 1,660 an ounce next week.

Grady pointed out that it is dangerous to be short at this time, while at the same time it is also not beneficial to be long gold. “Running out of gold in a market that has so much impression and recovery is dangerous. But every time gold goes up it is sold. Traders want to watch or follow this trend and follow this trend,” he said. he declared. “That’s why I’m neutral.”

Other data to watch out for

There will also be a list of new economic data to watch for next week. Data releases will begin with the NY Empire State manufacturing index on Monday and US retail sales and industrial production on Tuesday.

US housing starts and building permits are due out on Wednesday, followed by the Philadelphia Fed’s manufacturing index and jobless claims on Thursday.