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  • Gold is consolidating in the $1680s after prices cratered below the $1700 level during European trading hours.
  • Rising US yields were the initial catalyst of the sell-off and a stronger US dollar is another problem for gold.

Spot gold (XAU/USD) prices have been consolidating in the $1680s in recent trade after prices cratered below the $1700 level during early European trading hours. The means gold has dropped nearly $30 or around 1.7% on the session.

The precious metal appears to be finding some support at its previous monthly low, which sits just under $1680. A break below this level would open the door to a move support at the May 2020 lows around $1670. Beyond that, the next key area of support would be around $1450, the March 2020 Covid-19 induced panic low.

Driving the day

A pickup in US government bond yields was the initial catalyst behind gold’s drop under $1700 on Tuesday, with the 10-year yield hitting fresh cycle highs above 1.77% earlier on in the session before pulling back towards 1.70% more recently. With bond yields having pulled back in recent trade, the speed of the sell-off has eased, but the USD has continued to trade with a positive bias in wake of a batch of strong US data releases.

The first key US data to be released on the session was Case-Shiller house price data for the month of February, which was very strong; US house prices are up 12.0% on the year, boosted amid the low-interest-rate environment. High levels of house price inflation is not a concern for Fed policymakers who are intent in their insistence that the US needs more inflation, not less. Nonetheless, strong house prices are positive for the economy through the wealth effect (when people are sat on assets that have gained in value it boosts their consumption).

Meanwhile, and perhaps more importantly, Conference Board Consumer Confidence survey for the month of March was also released on Tuesday; the headline index jumped to 109.7 in March, meaning that consumer confidence has now recovered about half of the losses incurred as a result of the pandemic (prior to the pandemic, headline consumer confidence was consistently in the 120s-130s, but in the months after the pandemic it ranged between the 80s-100s). That was the largest jump in Consumer Confidence since the aftermath of the 08/09 financial crisis and reinforces the narrative that the US economy is on the path to recovery as the vaccine rollout continues and the economy returns to normal.

As long as this optimistic narrative remains intact, the likelihood is that US government bond yields will continue to gradually rise, a bad omen for precious metals. Meanwhile, as long as the US economic recovery continues to outpace other key developed markets (and emerging markets?), the USD is likely to continue to strengthen, another bad omen for precious metals.

However, the recent rise in Covid-19 cases in the US is triggering some concerns and ought to serve as a red flag that the US is not out of the woods just yet. If the recent uptick in infections turns into a more substantial rise in cases and states re-impose lockdown then this could dent US growth expectations for 2021. Naturally, this would push back Fed tightening expectations, which would weigh on USD and likely push yields lower. Both of these factors would be positive for gold.

But unlike the EU, the US has already been able to vaccinate most of its vulnerable population, meaning any third wave of Covid-19 infections is unlikely to result in a sharp spike in hospitalisations and deaths, reducing the need to lockdown. In other words, no European-style lockdowns – if this is the case (as most expect), then the US economic recovery remains on track and gold bears will remain confident.