Buoyed by falling bond yields and the slump in equity markets, safe-haven gold has been able to rise again today. However, the gains were limited because of the rebound in US dollar. But will the precious metal be able to shine more brightly going forward?
The precious metal has found some much-needed support over the past few weeks as US bond market investors have shrugged off growing signs of recovery in the world’s largest economy. Among other signs, we have seen stronger-than-expected non-farm payrolls data, an upbeat CPI report and blowout retail sales figure. Growth at the world’s second largest economy, China, has accelerated too. Last week we saw a record 18.3% q/y jump in Chinese GDP and a sharp 32.4% y/y rise in retail sales. Meanwhile, the pace of vaccinations has finally picked up in the Eurozone, which should hopefully push down the infection rates there and lead to easing of lockdowns.
Despite all this,
US 10-year bond yields have failed to respond in the way you would expect, and they have fallen, reducing the opportunity cost of holding gold:
Source: ThinkMarkets and TradingView.com
The drop in bond yields had also weighed on the US dollar. Today however,
the greenback rebounded amid mild haven flows due to a sharp sell-off in the equity markets with some investors happy to book profit as the earnings season kicks into a higher gear. But buck-denominated gold was still able to weather that mini storm as it held its own in the positive territory. Will it now be able to rise more meaningful?
Investors will be looking forward to the policy meeting of the
European Central Bank on Thursday for fresh direction. If Christine Lagarde provides a more dovish assessment of the economy and again suggests that QE purchases will continue for the foreseeable future, then this should weigh on European yields too and cause gold to climb.
From a technical point of view, gold bulls will be happy for as long as the metal can manage to hold its breakout above the pivotal $1765 level:
Source: ThinkMarkets and TradingView.com
Gold was facing some resistance from the bearish trend line around $1778-$1284 area at the time of writing. A clean break above this resistance area could pave the way for more gains, with no further obvious resistance levels in sight until $1800and the 3.2% Fibonacci level at $1829.
Meanwhile a failure to hold above the $1765 support could see the metal drop back to the point of origin of the breakout around $1745 initially.