Gold Price Tethers As Rapport With USD And Treasury Yields Is Tested

Gold Chart

XAU/USD Analysis

  • Gold/U.S. Treasury correlation flips.
  • Us Dollar is in focus.
  • Spot gold prices test key, long-term levels.

Gold Fundamental Backdrop

The historical inverse relationships between gold and both the greenback and U.S. Treasury yields are respectively weighing in on the precious metal. The Dollar Index (DXY) has held its high level of negative correlation to gold while bond yields have been displaying a change of heart since late April 2021 (note that correlation does not mean causation).

The chart below illustrates this phenomenon, as seen by the green and white synchronicity towards the right hand side of the chart. It seems as if the dollar is the main driver for gold prices between the two. The current low interest rate environment also accommodates higher gold prices, but unfortunately for gold bulls, the prices do not reflect the underlying fundamentals at this moment.

Spot Gold vs. U.S. 10-Year Treasury Yield vs. DXY

Gold Price Tethers as Rapport with USD and Treasury Yields Is Tested

Source: Refinitiv Datastream

Fundamentally, we may see a rally in gold with the Delta variant plaguing much of the developing world and many key financial and logistical hubs, as seen with the recent China port shutdown as well as Australia and New Zealand’s ‘zero tolerance’ approach to COVID-19. The safe-haven affinity with gold has been helping prices hold its head above key levels since the selloff two weeks prior.

The FOMC minutes held last week gave some guidance to market participants that QE tapering will resume before the end of 2021. In 2013, taper talk led to rising Treasury yields, which hammered gold prices. The approach from the Fed has been more cautious this time around, with markets relatively unresponsive to last week’s meeting.

Many people are linking tapering to tightening, which should not be the case, as tapering simply refers to a slowing of asset purchases and not an increase in interest rates in the short to medium-term.

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