Gold Price Forecast: Rising Yields, USD and Powell's Testimony in Focus

GOLD PRICE OUTLOOK:

• Gold prices bounced off key support at US$ 1,774 as the US Dollar weakened
• Rising 10-year Treasury yields and real yields may cap upside potential
• The world’s largest bullion ETF saw continuous outflows as investors turned to riskier assets

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Gold prices edged slightly higher during APAC session on Monday as the US Dollar (DXY) index traded steadily near the 50-Day Moving Average line. US Dollar weakness over the last two sessions offered gold prices some relief after a heavy selloff observed earlier last week. Markets await a fresh US$ 1.9 trillion US Covid relief package to be approved by Congress this week, while anticipating Fed Chair Jerome Powell’s speech in the semiannual monetary policy report to Congress this Tuesday.

Gold prices have been trending lower since early January, weighed by vaccine progress and rising longer-dated Treasury yields. The 10-year US Treasury yield climbed to a fresh 12-month high of 1.370% on Monday as vaccine rollouts and stimulus hopes bolstered inflation expectations. Meanwhile, reflation hopes probably led to a rotation out from safe-havens such as Treasuries into riskier assets, resulting in rising yields.

US real yields, represented by 10-year Treasury inflation-indexed securities, also climbed to -0.87% on February 18th, hitting the highest level since November 24th. Real yields exhibit a historically negative correlation with gold prices, and their inverse relationship can be visualized in the graph below. Further rises in real yields may serve to undermine gold prices, which is non-yielding.

Gold Prices vs. 10-Year Treasury Inflation-Indexed Security

Source: FRED

With inflation and rising yields increasingly concerning traders, Jerome Powell’s testimony this Tuesday will be closely eyed for any clues about future tapering. In view of encouraging vaccine progress around the globe and robust US retail sales figures in January, it might be difficult to argue that the economy remains weak and risks are skewed to the downside. However, any hint about tapering may be illusive as the job market has a long path to achieve full employment and core PCE inflation is well below the Fed’s 2% target. Nonetheless, it would be critical to see how Powell addresses surging yields and inflation expectations, which might inhibit the central bank from carrying out further easing measures.

Powell’s testimony may lead to heightened volatility in the US Dollar (DXY) index, which tends to be inversely correlated to gold prices. Gold prices exhibited a negative relationship with the DXY, with a correlation coefficient of -0.75over the past 12 months.

Gold vs. DXY US Dollar Index – 12 Months

Source: Bloomberg, DailyFX

The world’s largest gold ETF – SPDR Gold Trust (GLD) – saw continuous net capital outflows over the past few weeks. The number of GLD shares outstanding decreased to 386.7 million for the week ending February 19th 2021 from a recent high of 407.1 million observed on January 4th, marking a 20.4 million decline. Gold prices and the number of outstanding GLD shares have exhibited a strong positive correlation of 0.92 over the past 12 months (chart below).

Gold Price vs. GLD ETF Shares Outstanding – 12 Months

Source: Bloomberg, DailyFX

Technically, A “Descending Channel” is forming with consecutive lower highs and lower lows on the 4-hour chart. The ceiling of the “Descending Channel” may serve as immediate resistance, while the floor may serve as immediate support. The overall trend remains bearish-biased as suggested by downward-sloped moving averages. The MACD indicator has formed a bullish crossover, suggesting that a near-term rebound is possible.

Gold Price – 4 Hour Chart

IG Client Sentiment indicates that retail gold traders are leaning heavily towards the long side, with 88% of positions net long, while 12% are net short. Traders have increased both long (+3%) and short positions (+9%) overnight. Compared to a week ago, traders have increased long positions substantially (+21%) while cutting short bets (-15%).

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— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter