Gold Price Holds Ground as US Dollar Falls and Real Yields Rise. Where to for XAU/USD?

[MongiIG]

GOLD, XAU/USD, US DOLLAR, (DXY), FED, YIELDS - TALKING POINTS

• Gold may come under pressure with real yields on the march higher
• The lower US Dollar (DXY) was unable to boost gold after a data miss
• With volatility remaining subdued, is there a XAU/USD breakout ahead?

Gold was relatively stable even though the US Dollar tumbled on Friday. The US Dollar index (DXY) was down 0.52% on the day after US payroll numbers disappointed markets.

The change in non-farm payrolls came in at 199k instead of 450k expected for December. However, the unemployment rate dropped to 3.9% rather 4.1% anticipated.

Gold remains susceptible to rising real yields after Treasuries sold off again to end last week.

The benchmark 10-year note traded just shy of 1.80% on Friday, which is the highest level since the pandemic began.

At the same time, inflation expectations are falling across the curve. The 10-year breakeven inflation rate decreased from 2.6% toward 2.5% last week. This gives an implied real rate of around -0.70%.

Although it is negative, it much less negative than it has been previously. The chart below highlights the relationship between gold and real yields. On the face it, gold has held quite well so far.

In any case, nominal yields are positive and rising, which makes holding dollars a more attractive investment return than the yellow metal.

Aside from lifting real yields, if inflation expectations continue lower, this in itself may further undermine bullion.

The probability of the Fed lifting rates in March increased on Friday and the market is now pondering a potential timeline for the central bank to begin selling assets.

 

 

GOLD TECHNICAL ANALYSIS

Over the new year period, gold tried to rally toward the November 2021 peak of 1877.15 but it was unable to overcome the 1831.65 pivot point and that level may continue to offer resistance.

On that move higher, it went above the upper 21-day simple moving averages (SMA) based Bollinger Band but it was unable to follow through on the breakout and retreated back inside the range.

Despite notable daily ranges, volatility remains at subdued levels as illustrated by the relatively narrow width of the Bollinger Bands. A sustained breach of either Bollinger Band might see a trend unfold.

Support could be at the pivot points and previous lows of 1761.99, 1758.93, 1753.10 and 1721.71.

On the topside, resistance may lie at the previous highs of 1829.68, 1831.65 and 1877.15.

Chart created in TradingView

 

Written by Daniel McCarthy, Strategist for DailyFX.com. 10th Jan 2022