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  • Spot gold prices have been choppy on Monday but have largely stuck within a $1720-$1730 range.
  • USD weakness is supportive, but higher yields are capping the gains.
  • Strong data which serves as further evidence of US economic outperformance may support USD going forward, which could hurt gold.

Spot gold prices (XAU/USD) have been choppy on Monday but have largely stuck within a $1720-$1730 range. Spot prices have remained fairly well supported above the 21-day moving average at $1721, with USD weakness since the arrival of US market participants also helping to keep gold supported. At present, the precious metal trades flat on the day.

Driving the day

As noted, USD weakness (the Dollar Index has fallen from above 93.00 into the 92.50s over the past few hours) is helping to support dollar-denominated spot gold. However, gains are being capped by a jump in US government bond yields from last Thursday’s levels; 10-year yields are back comfortably above the 1.70% mark following last Thursday’s close under 1.68% and real yields are also a little higher, with the 10-year TIPS yield up about 3bps. As a reminder, non-yielding precious metals tend to have a negative correlation to the real yields on fixed-income assets, so when yields go up, precious metals become comparatively less attractive.

The fact that the US dollar has come under so much pressure despite US government bond yields being higher is unusual when compared to the price action over the last few weeks. Typically, the latter (bond yields) has been a primary driver of the former (the dollar), with higher yields generally putting upwards pressure on USD. In wake of a string of very strong tier one US data releases for the month of March (ISM Services PMI on Monday, the latest jobs report last Friday and ISM Manufacturing PMI last Thursday), higher yields (and higher equities, as we are also seeing) is not too surprising.

Whether USD can make a comeback in the coming days as markets realise that further evidence of US economic outperformance and growing momentum in the country’s economic recovery (which has hawkish Fed implications) is USD positive remains to be seen. For now, all the risk on, coupled with what might also be some profit-taking after a strong performance in March, appears to be weighing on USD. If the USD’s fortunes do take a turn for the better and yields continue to grind higher, this is not going to be a favourable combination for the likes of spot gold and spot silver.