Gold price rally remains unabated despite strong US bond yields
- Gold price hovers near fresh highs around $2,350 as the US Dollar remains sideways.
- US yields rally as traders pare Fed rate cut expectations.
- US inflation could guide market expectations for Fed rate cuts ahead.
Gold price (XAU/USD) records fresh all-time highs just above $2,350 on Monday. The rally in the precious metal remains unabated even though US Treasury yields increase after the robust United States Nonfarm Payrolls report for March shifted expectations for Federal Reserve (Fed) pivoting to rate cuts in the second half of this year.
10-year US Treasury yields rise to four-month highs near 4.45%. Generally, higher bond yields dampen Gold’s appeal as they increase the opportunity cost of holding investment in the latter. However, the case has not held up in the last few weeks.
Fed policymakers don’t see rate cuts as appropriate as robust labor market data could halt the progress in reducing inflation to the 2% target.
Even one Fed policymaker sees no need for rate cuts this year if price pressures persist. Last week, Minneapolis Fed Bank President Neel Kashkari said rate cuts won’t be required this year if inflation stalls. Kashkari, who is currently not a voting member, warned: “The Fed needs to keep interest rates higher in the range of 5.25%-5.50% if inflation remains stronger than hoped”. He added that “if that still does not work, further rate increases are not off the table, but they are also not a likely scenario given what we know right now," Reuters reports.
Daily digest market movers: Gold price continues to advance while US Dollar turns sideways
- Gold price trades close to all-time highs near $2,350 while the US Dollar fails to catch bid even though strong United States labor market data for March dents speculation for the Federal Reserve (Fed) to begin reducing interest rates, which are currently expected from June.
- The US Nonfarm Payrolls (NFP) report showed that the labor market recorded an increase of 303K fresh payrolls, significantly better than the 200K expected and the prior reading of 270K. The Unemployment Rate fell to 3.8% from the consensus and the prior reading of 3.9%. Robust labor demand is generally followed by strong wage growth as employers are forced to offer higher pay due to a shortage of workers. Higher wage growth boosts consumer spending, which keeps inflation stubbornly higher.
- The labor market data showed that the Fed does not need to pivot to rate cuts sooner. The CME FedWatch tool shows that traders are pricing in 48% for lowering borrowing costs in June, down significantly from 58% a week ago.
- After the strong US NFP data, Fed Governor Michelle Bowman said, “We are still not yet at the point where it is appropriate to lower the policy rate, and I continue to see a number of upside risks to inflation,” Reuters reported. Bowman remains confident that inflation will soften ahead with labor demand remaining strong. She added that if that happens, "it will eventually become appropriate to lower the federal funds rate gradually to prevent monetary policy from becoming overly restrictive.”
- Going forward, investors will focus on the US Consumer Price Index (CPI) data for March, which will be published on Wednesday. The inflation data will provide more cues about when the Fed could start reducing its interest rates. Strong price pressures could keep hopes of rate cuts for June off the table while soft figures could prompt speculation for the contrary.
Technical Analysis: Gold price jumps to $2,350
Gold price continues to add gains even though momentum oscillators turn extremely overbought – a situation when upside potential gets limited. The precious metal rallies to $2,350 but is expected to turn sideways as investors are expected to make fresh positions after the release of the US inflation data.
On the downside, March 21 high at $2,223 will be a major support area for the Gold price bulls.
The 14-period Relative Strength Index (RSI) reaches 84.00, which indicates that bullish momentum is still active. However, overbought signals have emerged.
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.