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  • XAU/USD prices have eased back from highs close to $1870 in recent trade
  • Spot gold prices remain well bid on the day, however, as US real rates remain depressed

XAU/USD prices have slipped back to the $1860 mark from earlier highs at $1868.62 amid profit-taking but hold onto solid gains on the day. Right now, the precious metal trades with gains of roughly 1.2% or over $20.

Low real rates support precious metal recovery

Most analysts continue to see the current market environment as USD bearish; unprecedented money supply expansion by the Fed during and since the Covid-19 crisis in March took the edge off of the safe-haven demand for USD. Now that safe-haven demand is being dealt further blows by vaccine news and a more hopeful outlook to 2021 and beyond as the world returns to “normality” regarding international trade under a Biden administration. This theme has persistently weighed on safe-haven USD, but has also hurt precious metals; spot gold, trading around $1860, is still significantly off August highs above $2000.

But amid a renewed focus on a return of inflation in 2021 has helped put a floor under gold demand; 10-year inflation breakevens are actually now above their pre-Covid-19 pandemic levels in the US. Given that the Fed still has interest rates on the floor, rising inflation expectations have pushed real US interest rates back down towards post-pandemic lows, further undermining the attractiveness of USD and increasing the relative attractiveness of precious metals like gold.

In fact, some argue that “risk-on” developments such as vaccines and more US fiscal stimulus might actually end up being net positives for gold given that they boost inflation (and precious metals are the ultimate inflation hedge), all while compressing real interest rates further (given that the Fed has said they are not raising rates any time soon), which again increases the relative attractiveness of precious metals.

Arguably then, the biggest threat to precious metals would be if the Fed indicated an intention to act early to quell inflation; but this policy of pre-emptively raising rates has been seen as a mistake in the past as, according to the Fed, it has resulted in financial conditions tightening earlier than desired. The Fed’s news average inflation targeting policy pretty much enshrines that they will be behind the curve when it comes to tackling rising inflation. If the Fed can even successfully get inflation to rise, that is… If not, then that means more stimulus or at least low rates for even longer, all of which should also benefit precious metals.

XAU/USD breaks back above 21DMA

During its stunning rally today, spot gold prices soured back above their 21-day moving average (DMA) at $1850, as well as above key resistance in the $1850s (the 9 and 19 November lows). This area thus ought to offer strong support going forward. To the upside, the 20 November high and 50DMA both sit at $1880, so this level is the next key area to watch in terms of resistance. Gold might well carve out a near-term range in this zone.