International spot gold traded in a tight range on Tuesday (January 19), hitting as low as $1,832.85 / oz. It is currently near the lower track of the downtrend channel since early August. The bulls have not yet organized an effective rally, and if they break below this point, they may open more downward space. However, the dollar retreat provided some support for gold as long dollar positions were profit-taking ahead of Treasury Secretary-nominee Janet Yellen’s testimony.
While real yields, as measured by the yield on 10-year Treasury inflation-protected securities, remain very depressed, last week’s CPI data suggest that inflationary pressures remain subdued, and the 10-year Treasury yield may continue to rise on expectations of more fiscal easing, meaning that real rates may have room to rise further. Given the negative correlation between real yields and gold price movements, gold is likely to see this downward pressure in the near term, unless further inflation data strengthens or the 10-year Treasury yield rewinds.
In addition to Yellen’s testimony, markets will be focused on Trump’s last day in the White House and the latest policy announcements that Biden may make. For now, Yellen’s testimony and statements have been anticipated by the market and are unlikely to cause much of a stir. Instead, what Mr Trump is likely to do will get the market’s attention. There are potential for new developments on issues such as travel bans and presidential pardons, as well as security concerns for the inauguration. Another key issue will be a vote in the Senate on a second impeachment case against Mr. Trump, though no date has been set.
Inflation risks and risk sentiment are now in a battle to help gold break out, so the dollar has become the main driver in the short term.
But looking ahead, after the volatility of the brief transition fades, investors are most concerned about the Biden team’s philosophy, which will have an important impact on the broader international landscape. President-elect Joe Biden’s nominee for secretary of state, Anton Blinken, will pledge on Tuesday to work to repair frayed U.S. diplomatic relations and build a united front against challenges from Russia, China and Iran, Reuters reported. In addition, a Biden transition official said Avril Haines, Biden’s nominee for director of national intelligence, will tell Congress on Tuesday that she will continue the U.S. ‘s strict censorship line on China and urge intelligence agencies to help address the pandemic.
Technically, gold has now broken below the 200-dma at $1843, which will be a key pivot point in the coming days, with initial resistance at $1,860 / oz, the 50-dma at $1,865, and then the 100-dma at $1886.50 / oz. Beleaguered bullish gold traders can take heart from yesterday’s price action. A quick rebound from the lows suggests a large number of buyers gathered around $1,800. However, we can see on the daily chart that the downtrend channel since early August has been narrowing, suggesting a breakout may be in sight.
Separately, the CFTC’s report on traders’ positions for the week ended Jan. 12 showed fund managers reduced their total speculative long positions in Comex gold futures by 3,6,039 contracts to 131,057 contracts. Short contracts, meanwhile, rose 2,296 to 52,823. Net long gold contracts are now 78,234 contracts, down more than 36% from the previous week. Bullish bets on gold have fallen to their lowest level since May 2019, the report said.
Ole Hansen, head of commodity strategy at Saxo Bank, said: “With 10-year bond yields above 1%, the strength of the dollar spooking speculators, net long positions in gold have fallen sharply.”
Joe Foster, portfolio manager of VanEck International Investors Gold Fund, says inflation could surpass the Fed’s 2% target as early as April, and that a high-inflation environment will be the main catalyst for Gold to break its all-time high above $3,000 an ounce.
Analysts at TD Securities said on Friday that the decline in speculative interest could weigh on gold. “Looking ahead, gold is likely to remain under pressure until weakness in the real economy leads to a pullback in market optimism — which, in our view, could happen soon,” it said.