Following today’s drop in equity prices
, in part because of delays in vaccine rollout in Europe, yields on US 10-year bonds dropped 5% while German bund yields fell almost 7% and UK yields dropped even more. The risk-off tone from equity and bond markets helped to support the dollar, causing the likes of the ERU/USD and GBP/USD, as well as buck-denominated gold and silver, to drop. But with yields going lower, this has reduced some of the bearish bias on gold, which has been struggling for direction over the past few months. I therefore reckon gold could be about to stage a rebound.
The fact that global bond yields have fallen back, this reflects concerns that the pandemic won’t be over any time soon and that central banks will keep monetary policy loose for years to come. The renewed weakness in yields come after they had recently risen with bond market investors probably no longer expecting any further stimulus from major central banks. This makes some sense as the ongoing vaccine rollout means the pandemic and lockdowns can, hopefully, be declared over at some point later this year. We have also secured a Brexit deal while a massive European Union fiscal package is forthcoming. The need for the ECB, Fed and BoE to continue offering as much support is thus diminishing. However, to suggest bond yields will stage a sharp rally – or bond prices will sell-off sharply – is very premature. While yields can stabilise further, it is worth remembering that they sit near historically low levels and central banks will be keen to keep them low for a long time to come.
In other words, conditions remain ripe for gold and silver to remain supported. Meanwhile, the dollar could be kept under pressure as the likes of the euro and pound may be able to push further higher over time given the above reasons. As a result, the dollar index could struggle to sustain its recent rebound and this may support gold and silver further.
From a technical point of view, gold’s latest rebound off the 200-day average continues to suggest the long-term trend remains bullish and investors are happy to buy the dips. Thus, unless prices break below the 200-day average sharply, the path of least resistance remains to the upside.
Source: ThinkMarkets and TradingView.com
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