Gold Plunges on Surging U.S. Treasury Yields

Gold bars

On Wednesday, gold prices fell near their one-week low touched in the previous session. The bullion lost its appeal as the prospect of the Federal Reserve’s aggressive rate hikes boosted bond yields. The benchmark Treasury yields jumped to a two-year high and raised the opportunity cost of owning the non-interest-bearing metal. The higher yields, in turn, support that dollar and put it back above key support levels. The strong greenback made the yellow metal more expensive for investors using rival currencies.

Spot gold is currently trading at $1,812.69 per ounce as of 0830 GMT.

DailyFX strategist Ilya Spivak predicted a downside breakout in gold prices. He explained that when inflation expectations slow down, nominal rates would go up and push real yields up. Though gold benefits from higher inflation, it is very sensitive to higher interest rates.

Nicholas Frappell, the global general manager of ABC Bullion, added that the rising real rates would keep the bullion on the defensive. He predicted gold to test the $1,800-$1,792 level.

On the technical front, Thomas Westwater of DailyFX suggested that the rising Simple Moving Average (SMA) may underpin gold prices this week. He noted that the bullion has been on the downward trend since its failure to breach the resistance near $1,830. The key SMA is currently below current prices. If gold slips below that, it could test the key psychological level at $1,800 per ounce.

Westwater also mentioned that the Ukraine-Russia crisis boosted the bullion’s volatility hedging attribute. The yellow historically performs well during periods of major military conflict. And the U.S. believes that Russia will invade Ukraine at any time. Moscow continues to move more troops to the Ukraine border despite mounting international pressure.

However, Spivak noted the geopolitical instabilities in Eastern Europe are not having the expected effect on gold prices. The metal appears to be firmly anchored to the Fed narrative.

Two other geopolitical issues support the yellow metal. One is the outage on a pipeline from Iraq to Turkey, which raised supply concerns and pushed oil prices to a seven-year high. The other is the Houthi militants’ attacks on Abu Dhabi. The UAE government vowed retaliation for the Houthi-claimed attack that killed three people. A Saudi-led coalition has already begun airstrikes on Sanaa. But some analysts believe that Iran was behind the attack on Abu Dhabi.