Gold has been in retreat thus far this week, closing under $1968 per ounce to a two-week low. Rising US bond yields, together with some easing of geopolitical risk, appear to be the primary drivers. A slightly firmer dollar completes the picture.
Some of the US bond market euphoria has dissipated this week, with the 10-year US Treasury yields moving up modestly after last week’s hard rally. Speeches on Monday by Fed Governor Cook (dove & voter) and Minneapolis Fed President Kashkari (hawk & voter) have done little to provide clarity on the rate outlook. Nevertheless, futures markets still suggest a better than 50% probability of a US rate cut by May 2024.
With the conflict in the Middle East moving into its fifth week, there are also signs that investors’ perception of geopolitical risk is waning, undermining ‘safe-haven’ gold. The concept of ‘humanitarian pauses’ in the fighting appears to be gaining traction, while the (WTI) crude oil price has declined to a 15-week low, suggesting confidence that the regional conflict won’t spread.
While weak crude pricing might also be interpreted as indicative of deteriorating demand and economic growth outlook, it is unclear whether this is currently tempering rising US bond yields. Intriguingly, flow data for physical gold funds suggests net inflows so far this week, despite these headwinds and recent gold price weakness. In the meantime, gold now appears to be poised at key technical levels.
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