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  • Spot gold prices (XAU/USD) have spent the majority of Wednesday’s session on the back foot.
  • Strength in USD and stock markets have weighed on the precious metals.
  • But bond mark signals are more bullish; inflation expectations have been rallying.

Spot gold prices (XAU/USD) have spent the majority of Wednesday’s session on the back foot and currently trade in the low $1830s (just above two-week lows), having dropped back from Asia Pacific session highs in the low $1840s. At present, the precious metal trades around 0.3% or $5 lower on the day.

Driving the day

A stronger US dollar (market analysts suggest that a “long overdue” short-squeeze is underway given prolonged overly bearish market positioning) combined with an upbeat tone to risk appetite that has seen stocks and crude oil markets make further upward strides are both hurting demand for the yellow metal on Wednesday; market optimism is being driven primarily by 1) stimulus optimism, as the budget conciliation process gets underway in the US Congress and 2) pandemic/vaccine optimism, as infection rates in key developed markets slow, mass vaccination programmes continue to make progress and new data suggests encouragingly strong levels of efficacy amongst existing vaccine candidates.

Strong US ISM PMI numbers released so far on the week also seem to be boosting market optimism, in that they show a US economy holding up better than feared, right as the economy is expected to be sent into overdrive by the most recently approved stimulus package. This is arguably being taken as a USD positive (and precious metal negative), even if all of the stimulus is going to be funded by debt, most of which is going to be monetised by the Fed, thus further expanding the money supply (a typical precious metal positive).

Bullish bond market signals

Bond market signals have been much more positive on Monday; whilst real US yields show a mixed picture (5-year TIPS fell to fresh all-time lows close to -1.86%, 10-year TIPS was broadly unchanged around the mid-1.00s% and 30-year TIPS was unchanged around -0.25%), inflation expectations have rallied; 10-year break-evens are up about 4bps on the day to above 2.17% (implying markets expect US CPI to average 2.17% over the next 10 years) and 30-year break-evens are above 2.15%. Given that precious metals are seen as an inflation hedge, as long as break-evens continue to move higher, this ought to offer precious metals such as gold some respite versus a rising USD and improving risk appetite.

XAU/USD key levels