On Thursday (February 25), the dollar index continued its upward trend and is now trading around 90.15, while spot gold has suffered a wave of short-term selling, with gold prices just below the important $1,800 / oz level and briefly approaching $1,795 / oz. On Thursday night in Hong Kong, investors will get key economic data, including U.S. GDP, that is expected to give the market another run.
Spot gold recovered most of its losses after falling more than 1 percent early on Wednesday, helped by dovish comments from Federal Reserve Chairman Colin Powell. Spot gold settled at $1805.34 an ounce, down 24 cents, or 0.01%, from an intraday high or low of $1783.56.
Fed Chairman Jerome Powell told the Senate Banking Committee on Tuesday that there were signs the economy was recovering from its new slump, but that the Fed was likely to keep its accommodative policies in place for a while. Mr Powell reiterated on Wednesday that US interest rates would remain low and that the Fed would continue to buy bonds to support the US economy.
“Powell has been very dovish over the past two days, so the risk-friendly Powell has given the stock market a boost, which is negative for the dollar and thus gives gold a bit of breathing room,” said Tai Wong, a trader at BMO, an investment bank, in New York.
According to Economies.com, gold prices rebounded strongly after falling earlier on Wednesday and tested a key resistance of $1800.00 an ounce. But after breaking below $1800.00 again, gold reactivated the bearish trend scenario, with lower targets at $1765.00 and $1740.00, according to Economies.com.
Analysts noted that high Treasury yields have a negative impact on gold prices. The yield on the benchmark 10-year US Treasury hit 1.4 per cent for the first time since February 2020.
Higher yields tend to reduce gold’s appeal as an inflation hedge because it increases the opportunity cost of holding bullion.
Matt Orton, portfolio expert at Carillon Tower Advisers, noted that U.S. Treasury yields have risen to their highest levels in nearly a year, a sign that the market appears to be more receptive to talk of an economic recovery, which has had a negative impact on gold.
In particular, Fed Chairman Colin Powell said the recent rise in Treasury yields was a healthy sign for the economy and played down concerns about inflation in U.S. fiscal policy, Orton said.
The yield on the 10-year Treasury note rose to 1.429% on Wednesday, forcing investors to rethink the benefits of owning gold, according to MarketWatch.
Ole Hansen, analyst at Saxo Bank, said: “Powell did say that the recent rise in bond yields is a sign of confidence in the US economy, which could mean that the Fed is willing to allow rates to rise further, which would challenge gold. For gold to recover again, it needs to keep an eye on inflation. The focus has faded and been replaced by current concerns about higher yields.”
“Rising bond yields continue to weigh on the gold market,” said Phillip Streble, chief market strategist at Blue Line Futures. Even with talk of more stimulus, gold has yet to find any way to a sustainable recovery. Mr. Powell doesn’t seem worried about the rise in 10-year Treasury yields, which is really bad for gold.
Tyler Richey, co-editor of Sevens Report Research, said the relationship between U.S. bond yields and gold prices is more noteworthy than the relationship between the dollar and gold prices.
US GDP hits big
Fourth-quarter US gross domestic product data will be released at 21:30 Hong Kong time on Thursday. It’s the economic data that investors will be watching most of the day.
Real GDP is expected to have risen at a 4.2 percent annualized rate in the fourth quarter, the survey showed. At the end of last month, America’s first estimate of fourth-quarter GDP came in at a 4% annual rate.
ING currency strategists noted that fourth-quarter U.S. GDP data should be revised modestly upward.
Analysts said the dollar could get a boost if the U.S. GDP revision is higher than expected, while gold prices could suffer further.
Economists expect the U.S. economy to return to growth over the summer as additional stimulus measures take effect and more Americans get vaccinated.
In addition to the U.S. GDP data, investors will look ahead to key U.S. data on Thursday, including weekly initial jobless claims, January durable goods orders and the January NAR seasonally adjusted contract sales index for existing homes.
Some analysts said the better-than-expected new home sales data pushed bond yields higher, which in turn weighed on gold prices.
On Wednesday, the Commerce Department said sales of new homes rose 4.3% last month to a seasonally adjusted annual rate of 923,000 units. The figure was significantly better than the consensus forecast for sales of about 853,000 units.
Jim Wycoff, senior market analyst at Kitco, noted that rising government bond yields were negative for the precious metals market in the middle of the week, with benchmark US Treasury yields currently at 1.4%, a one-year high. The bulls are also struggling from a technical perspective, with gold in a downtrend on the daily chart.