Gold prices marked their first loss in five sessions on Tuesday, with prices pulling back from their the highest levels since February as a rise U.S. Treasury yields dulled demand for the precious metal.
“The modest increase in U.S. 10-year yields appears to be taking the edge off the recent rise in gold prices, along with the fact that it is also closing in at resistance” at its 200-day moving average, said Michael Hewson, chief market analyst at CMC Markets UK, in a market update. The 200-day MA was at $1,866.08, according to FactSet data.
Moves in gold came as 10-year Treasury yields BX:TMUBMUSD10Y moved up to 1.62%, while the U.S. dollar, as measured by the ICE U.S. Dollar Index DXY, was around the lowest level in 2 1/2 months.
Treasury yields have moved up so the short-term move for gold is likely due to “fear of yields busting through their former ceiling marked this past month,” said Adam Koos, president of Libertas Wealth Management Group. “If this happens, I’d expect it to put some downside pressure on gold,” he said.
However, the dollar is also “breaking down simultaneously,” so that may provide some support for the metal, he told MarketWatch.
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For now, Koos said he sees a “financial tug-of-war taking place between rates and the dollar with gold stuck in the middle.”
If selling in the stock market continues, “the safety trade could cause the yellow metal to prevail in the short term,” he said. “Still, I think long-term inflation expectations will likely keep a more intermediate-term bid underneath the price in gold.”
Some analysts, however, are pointing to growing concerns that rising inflation in the U.S. and other countries could prompt the Federal Reserve to remove its easy-money policies sooner than expected in the aftermath of the COVID pandemic.
Data on Tuesday showed that prices at factories in China rose at the fastest pace in 3½ years in April. China’s producer-price index rose 6.8% last month from the period a year ago, the National Bureau of Statistics said.
Gold is viewed as a hedge against inflation but if concerns about pricing pressures causes the Fed to raise interest rates that could undercut appetite for precious metals, which don’t offer a coupon and compete against U.S. Treasurys.
On the other hand, “the threat of stagflation continues to emerge as an underlying market theme, and that is supportive of gold for one main reason: lower real interest rates,” analysts at Sevens Report Research, wrote in Tuesday’s newsletter.
“A stagflation environment would mean that only one of the factors of the Fed’s dual mandate, i.e. inflation, would be reached while full employment would not,” they said. “In such a dynamic, the Fed would likely remain accommodative longer than they should, keeping rates artificially low while inflation runs hot, pressuring real interest rates—which always results in an appealing environment for gold.”
Given that, they see gold as a “potential big winner if we see inflation continue to firm, but growth metrics begin to roll over.”
Selling in global stocks, with the Dow Jones Industrial Average
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Among other Comex metals, copper notched a record high as the global economic recovery continues, with prices topping the settlement from Friday.
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