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  • Spot gold prices are consolidating in the $1780s after dropping below $1800.
  • The stronger US dollar and a stepper US yield curve are weighing on the precious metal.

Spot gold (XAU/USD) prices are looking heavy midway through US trading hours on Thursday. Earlier in the day, spot prices slumped beneath the psychologically important $1800 level and now trade in the $1780s, down more than $40 or just under 2.5% on the day. The move saw spot prices break beneath the prior 2021 low at close to $1803 and gold bears will now have their sights firmly set on the 30 November 2020 low at $1764.57.

Dollar strength, steepening yield curve weighs on precious metals

A few factors are being cited as weighing on gold prices on Thursday. For one thing, the US dollar continues to make upward strides; the Dollar Index has moved above the 91.50 mark for the first time since right at the start of December 2020 (note that gold and other precious metals typically have a negative correlation to the buck).

In terms of why the US dollar is picking up, it is difficult to pinpoint any particular drivers, but market commentators are pointing to 1) an ongoing short-squeeze, after short positioning entered the year at historic extremes, 2) the US’ comparatively fast vaccination drive (versus the EU for example), 3) positive signs coming from the US Congress with regards to the next fiscal stimulus package and, finally, 4) strong data on the week boosting hopes for a strong official jobs report for January on Friday.

Back to gold; another factor being cited as weighing on the precious metal is a further steepening of the US yield curve. The 2s10s (the difference between the 2-year US government bond yield and 10-year yield) widened more than 3bps further on Thursday to highs of above 105bps. Analysts at TD Securities comment that the steepening of the yield curve “ultimately means the cost of holding gold across the curve is increasing… Gold could go even lower and consolidate in response to … the whole idea that the US and global economy are recovering”.

Meanwhile, ActivTrades chief analyst Carlo Alberto De Casa commented that “growing expectations about a relatively quick end to the pandemic are raising economic recovery hopes and with it the likelihood of central banks reducing the current hyper-dovish monetary stimulus”; if monetary policy dovishness has bottomed out globally (i.e. the rate of money supply expansion and easiness of monetary conditions has peaked), then this is not going to be a good thing for precious metals markets that are primarily seen as a hedge against fiat currency debasement.

XAU/USD key levels