Gold Down, but Falling Treasury Yields Counter Improved Risk Appetite

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Gold Down, but Falling Treasury Yields Counter Improved Risk Appetite

CommoditiesDec 29, 2021 

By Gina Lee

Investing.com – Gold was down on Wednesday morning in Asia, with falling U.S. Treasury yields countering the impact from slightly improved risk sentiment, and giving the yellow metal a boost.

Gold Futures edge down 0.19% to $1,807.45 by 10:41 PM ET (3:41 AM GMT), and benchmark 10-year U.S. Treasury yields edged lower.

Asia Pacific shares were mostly lower on Wednesday, even as concerns over travel disruptions and store closures due to the omicron COVID-19 variant diminished.

For its part, gold continued on a downward trend over increasing evidence that omicron does not pose a major threat to the global economic recovery and investors retreated from the safe-haven asset.

Omicron isn’t “the same disease we were seeing a year ago,” and even patients who do end up in the hospital spend less time there, according to University of Oxford immunologist John Bell, reinforcing reports about the variant’s overall milder nature.

However, daily COVID-19 cases exceeded 1 million for a second consecutive day with the pressure mounting on healthcare systems.

Gold is set for its first annual loss in three years, after hitting an all-time high in 2020, with central banks beginning to withdraw COVID-19 stimulus packages to curb rising inflation. Although the remaining uncertainty over omicron has somewhat boosted demand for safe-haven assets, concerns over the threat to economic activity and reopening are beginning to die down.

With volumes thin on Wednesday, investors expect this trend to continue and a tight range throughout the remaining trading days of 2021.

In other precious metals, silver inched down 0.1%, platinum fell 0.7%, and palladium fell 1.5%.

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Gold Prices Cede Ground as Omicron Fails to Charge Breakeven Rates

 

GOLD, XAU/USD, OMICRON, BREAKEVEN RATES, TECHNICAL OUTLOOK - TALKING POINTS

• Gold prices extending overnight losses in APAC trading.
• Omicron lifts breakeven rates but probably not enough.
• XAU/USD’s Technical posture looks to advantage bears.

Gold prices hit the highest level since November 22 overnight before the yellow metal trimmed gains and shifted lower. A modest rebound in the US Dollar due to a bout of risk aversion on Wall Street likely weighed on prices. A stronger Greenback makes the metal more expensive for foreign buyers, which dissuades overall demand.

Bullion prices are extending losses through Asia-Pacific trading, although selling appears to be marginal. Gold has been trending higher since December 15, when the November swing low was quickly breached. Since then, the psychologically important 1800 level was overtaken while the US Dollar has largely consolidated just below its yearly high when looking at the DXY index.

A rise in inflation expectations, along with the pause in USD strength, has helped gold gain its footing in recent weeks. US breakeven rates – which measure the gap between nominal and inflation-adjusted yields – have risen over the last week, although they remain below levels seen in early December. The 2-year breakeven rate is trading near 3.156% from the December low, which was 3.025%.

The Omicron variant is likely providing inflation expectations a tailwind as some fear widespread lockdowns and tighter social distancing measures may exacerbate ongoing supply chain issues, which could drive up prices. However, with Covid fears starting to subside – despite a significant increase in daily cases across key economies – those inflation expectations may soon lose steam. That would work to gold’s detriment seeing as breakeven rates have failed to close the gap with levels earlier in December.

XAU/USD TECHNICAL FORECAST

Gold is back near the 200-day Simple Moving Average (SMA), with the 1800 psychological level in focus as well. A Rising Wedge pattern is also taking shape, opening the door for a potential breakdown below support. If prices manage to avoid that and hold above 1800, it may open the door for gold to test a level just above 1830 that served as major resistance from July To September. MACD and RSI are oriented sharply lower. Overall, it appears the path of least resistance may be to the downside.

XAU/USD 4-HOUR CHART

Chart created with TradingView

 

Written by Thomas Westwater, Analyst for DailyFX.com. 29th December 2021.