Gold Rises on Soft Dollar, Gains Capped by Surging Yields

gold bars

Gold prices inched higher on a slightly weaker dollar. The decline in the dollar index boosted the yellow metal’s appeal to investors who use rival currencies. But the bullion’s upward momentum was limited by the rising bond yields. The U.S. benchmark 10-year Treasury yields jumped to their highest level since May 20. It raised the opportunity cost of owning the non-interest-bearing metal. Solid earnings expectations for the third quarter, which boosted U.S. equities, also weighed on the bullion.

Spot gold is currently trading at $1,777.40 per ounce as of 0840 GMT.

Stephen Innes, a managing partner at SPI Asset Management, said gold continues to thrive despite the strong headwinds against it. But a hawkish move by the Federal Reserve would push bullion prices down. He also noted that the markets remain optimistic about the direction of the U.S. economy given the uptick in U.S. bond yields and equities. And this poses another challenge to gold’s safe-haven appeal.

ANZ analysts agreed with Innes. While risk appetite dampened the demand for the bullion, it was supported by the strong offtake during the festival season, they said.

On the technical front, DailyFX head strategist Ilya Spivak said the overall gold price trend points lower despite the consolidative pause. The Fed Beige Book is currently the main price driver for the bullion. If it shows that rising inflation expectations are affecting economic growth, tightening bets might firm and gold prices will swing lower. The next major inflection point would be the FOMC policy announcement due on November 3. It is likely to announce tapering, and rate hike bets would follow.

Spivak sees the initial support price level for gold at $1,750.78, followed by $1,717.89, and then below the $1,700 mark. Resistance begins at $1,808.16 followed by a top range at $1,834.14.

Meanwhile, economists polled by Reuters believe that persistent inflation poses great risks for the U.S. economy. But the majority of them do not see the Fed raising interest rates until 2023.

A Deutsche Bank survey also found that investors expect the Feds and the European Central Bank to maintain a loose monetary policy for too long.

Yesterday, Fed Governor Michelle Bowman said a higher inflation rate might last longer than expected. But if inflation keeps rising and does subside as expected, Fed Governor Christopher Waller suggested that the central will need to adopt a more aggressive policy response.

In Europe, ECB Chief Economist Philip Lane said market expectations for future interest rates are not consistent with the central bank’s guidance of not raising rates until inflation stabilizes at 2%.