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  • Gold prices remain stuck within this week’s $1725-$1745 range amid the conflicting forces of a stronger dollar versus lower yields.
  • But with the risks tilted to the upside for both USD and yields, gold’s long-term outlook isn’t great.

Spot gold prices remain locked within this week’s mid-$1720s to mid-$1740s ranges, with prices having recently rallied to the top of this range before pulling back. The 21-day moving average continues to be a sticky level for spot gold, with prices hardly moving more than $10 from it so far this week; the 21DMA currently resides around $1729.50. On the day, spot gold trades flat.

Driving the day

As has been the case all week, spot gold prices remain caught between the conflicting forces of a gradually rising US dollar (the DXY has now crept as high as the 92.70s, its highest levels so far this year, after it broke above the 92.00 level on Tuesday) versus falling US government bond yields. Real yields (i.e. the inflation-adjusted return on government debt) are more closely correlated with gold prices than nominal yields, but both are down sharply on the week; 10-year TIPS yields have fallen back below -0.7% from highs above -0.6%.

The bond market sell-off that has driven yields higher has eased this week, likely as a result of profit-taking by those shorting bonds, as well as higher yields attracting greater levels of investment – the last few US government debt auctions have gone well and a 7-year note auction is in focus for later in the session. Meanwhile, a safe-haven bid into bond markets might also be helping to push yields lower; this week has seen concerns grow about the spread of Covid-19 in Europe and elsewhere, as well as chatter in the US about higher corporation taxes to fund the infrastructure stimulus package – risk assets have suffered as a result and this might be helping bonds. Note that many desks are also calling for month-end flows to be bond price positive (and yield negative).

If bond yields continue to drop, gold should move higher, and only further USD strength could halt this. But amid the current market backdrop, the risks for USD do look tilted to the upside; the dollar has also been gaining amid the more defensive risk tone, as markets fret about rising Covid-19 cases and lockdown in Europe and other key emerging economies, as well as amid rising West versus China and Russia tensions (sanctions have been being thrown all over the place this week).

While the global outlook has darkened, things still look pretty positive in the US, with the vaccine rollout going well and the economic recovery at the moment looking very much on track (survey data for the month of March has been very positive). Fed officials, whilst admitting there is a long way to go for a full economic recovery, are bullish on the US economy this year and some are even talking about hikes in 2022 and 2023. This narrative of optimism in the US but increasing pessimism abroad has been supporting the USD and, if it continues, this could hurt precious metals, or at least rob them of any gains that they might have derived from lower bond yields.

Not that most analysts expect bond yields to drop substantially further from here anyway; the above-mentioned US economic optimism, if it continues (as most expect that it will) is likely to continue to push yields higher, even if the ride is bumpy (as has been the case this week). In the long-run, this is unlikely to be positive for gold.