Gold, Crude Oil Price Forecast: Edging Higher On The Back Of Stimulus, Saudi Oil Facility Attack

Gold prices bounced from a 9-month low and traded modestly higher during the APAC session on Monday after Senate Democrats passed the US$ 1.9 trillion Covid relief package. The bill will go to the House for approval on Tuesday before being sent to President Joe Biden’s desk for signing. The fruition of the long-anticipated fiscal stimulus is likely to bolster consumer spending, vaccine distribution and continuous unemployment aid, and therefore higher inflation expectations. The 5-year breakeven inflation rate has surged to 2.495% - a level not seen since before the 2008 subprime crisis. Gold has long been perceived as a good store of value and inflation hedge, therefore its price may be a lifted by rising inflation outlook.

Besides, there seems to be rising demand for safety after Saudi Arabia’s key oil facility in the Ras Tanura export terminal was attacked by a drone. The news not only sent oil prices to a fresh 12-month high, but also boosted gold prices due to rising geopolitical uncertainties in the Persian Gulf area.

A rapid surge in longer-dated Treasury yields has exacerbated the selloff in gold recently, with its price tumbling more than 5% over the past 8 trading sessions. The 10-year US Treasury yield climbed to a fresh 12-month high of 1.622% on March 5th before pulling off slightly. The rate reclimbed to 1.584% at the moment of writing, exerting downward pressure on precious metals. Fiscal stimulus-backed reflation hopes may lead yields to trend higher alongside inflation expectations, which appears to be bad news for bullion prices.

US real yields, represented by 10-year Treasury inflation-indexed security, stood at -0.658% on Monday, extending the upward trajectory as the rise in nominal yield surpassed the rise in inflation expectations. Real yields exhibit a historically negative correlation with gold prices, and their inverse relationship can be visualized in the graph below. Further rises in real yields may serve to undermine gold, which is non-yielding.

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