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  • Spot gold prices have been moving sideways in recent trade just below $1880.
  • The precious metal has been caught between conflicting forces from a falling USD and rising real US interest rates.

Spot gold (XAU/USD) has flatlined in recent trade just under the $1880 level, with the precious metal caught between conflicting forces of a falling USD and rising US real interest rates. At present, XAU/USD trades lower by about 0.2% or just over $4 on the day.

Gold caught between conflicting forces…

Two of the key drivers of gold have been moving in the opposite direction to each other in recent trade; the Dollar Index (DXY) has dropped roughly 100 points from Monday European session highs just above 91.00 to just above 90.00, barely above last Friday’s closing levels in the 89.90s. Meanwhile, the US 10-year TIPS yield has moved significantly higher from European session lows of just under -1.08% and now currently trades around -1.02%.

Note that spot gold typically has a negative correlation to USD, so when DXY weakens, that is typically positive for gold and has a negative correlation to real interest rate, so when (for example) the 10-year TIPS yield rises, gold typically falls. Given price action during the Monday US session (rising real yields and falling USD), gold has subsequently been caught in the middle of conflicting forces.

What next for gold?

The recent unwind in USD strength and rising in US real yields (which has tracked a rise in nominal yields) reflects an unwind in the fairly severe risk-off move witnessed during the Asia Pacific and European morning session amid concerns regarding news coming out of the UK about a rapidly spreading, more contagious new strain of Covid-19 that has triggered lockdowns in the country and an international ban incoming passengers from the UK.

No particular theme has been behind the unwind; perhaps USD bears taking advantage of a significant intra-day rally to get short amid what seems to be a structurally bearish market for the buck. Indeed, this weekend’s Covid-19 news is not a game-changer for the narrative that 2021 and beyond will see a solid recovery as the global economy moves towards herd immunity to Covid-19 through vaccination programmes (scientists think the vaccine will still work against the new UK strain) and as the Biden Administration spearheads a return to “normality” regarding global trade, all of which should be USD negative. If that is the case, that could be bullish for gold.

Meanwhile, as Congress moves closer to a deal on further fiscal stimulus, it seems as though some of the safe-haven bid into US bond markets has been unwound. But it is likely that going forward, US real rates are likely to remain fairly low; the Fed was keen to emphasise that its ultra-accommodative policy stance is not going anywhere any time soon at its policy meeting last week and are likely to intervene via more QE if yields start to rise too fast. Even if yields do rise as a function of additional US government debt issuance to fund the currently being ratified next round of Covid-19 fiscal stimulus, all the stimulus hitting the economy from both the Fed and the government is likely to further boost inflation expectations, which will keep real yields suppressed. If the US 10-year TIPS yield holds below -1.0% in the coming weeks/months, or perhaps moves even lower to test the 2020 lo around -1.1%, this would be bullish for gold.