The lira plummeting offsets yields! Dollar stabilization limits gold rally momentum! Can physical demand and political risk be outflanked?

Spot gold fell slightly on Monday, touching as low as $1,727.10 an ounce, as a sharp fall in the lira provided some support for the dollar and limited gold’s rally, despite a modest retreat in Treasury yields.

Turkish President Recep Tayyip Erdogan’s firing of the country’s central bank governor — the third in two years — sent shockwaves through the investment community and sent the lira tumbling. The dollar briefly surged above 92 today as a plunge in the lira triggered a flight to safety in the greenback. The dollar hit a one-week high on Friday after Treasury yields rebounded as the Fed allowed an exemption from capital requirements imposed in response to the outbreak expired. In recent weeks, the dollar has risen as Treasury yields have risen.

Although the dollar index is still struggling to break above 92 for now, the dollar’s momentum seems to have reversed as the bears have capitulated. The question now, notes Khoon Goh at ANZ, is “how much hedge funds will be willing to go long on the dollar” and how much asset risk will be affected if the dollar soars from now on.

Geopolitical risk, however, still provides some support for gold. The United States on Monday imposed sanctions on two more Chinese officials in connection with human rights issues in China’s Xinjiang region, shortly after a meeting of senior U.S. and Chinese officials concluded last week. Britain, along with the European Union, has imposed sanctions on four Chinese officials and a Chinese agency over human rights abuses in Xinjiang.

The move came after the European Union announced sanctions against Chinese officials the same morning, prompting fierce retaliation from Beijing. China immediately announced tit-for-tat asset freezes against 10 EU figures, including European politicians, the EU’s main foreign policy decision-making body, the Political and Security Committee, and two leading think tanks.

Overall, the political situation remains tense, especially since Mr. Biden’s moves in office have led to speculation about possible future changes in U.S. -China relations, which could spark some safe-haven bids in gold.

On the other hand, rising bond yields and outflows from gold ETFs have battered the price of gold in the past, although recent demand for physical gold in many countries has stemmed the downward trend. Gold demand in Asia has boomed in the past two months as fears of a pandemic have eased and the price of the precious metal has been at multi-month lows after nearly a year of stagnation. Thus through the physical gold market to provide some support to the gold price.

Technically, gold has so far managed to defend support for the short-term uptrend line. However, there is a lack of strong follow-on buying above the $1,740-42 range, so caution should be taken before positioning for further gains. In addition, after the Fed meeting, gold’s uptrend faltered before horizontal support turned to resistance at $1,760-65, which is not good for gold’s rebound.

A sustained break below the above trendline support, currently near the $1,728 area, would reaffirm the negative bias and pave the way for further weakness. At that point, gold could become vulnerable, with a break below the $1,720 midpoint of support accelerating its slide towards the $1,700 mark.

Aftermarket outlook:

“Powell’s comments on interest rates are very supportive of gold, but on the other hand, the fact that the 10-year yield continues to rise limits any upside for gold,” said Bob Haberkorn, senior market strategist at RJO Futures.

David Russell, director of marketing at Goldcore, said gold was strongly supported by the Federal Reserve’s statement last Wednesday that its ultra-loose monetary policy will continue through 2023.

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