This article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).
Gold traded at $1295.56 on Monday, the highest level since Donald Trump’s election triggered the ‘reflation’ rally across the global asset markets and the US yields.
After reaching their highest by mid-March, the US 10-year yields started their descent and finally hit the 2.20% level after Donald Trump complained about the US dollar’s strength at a speech delivered last week. The US Treasury Secretary Mnuchin stepped in as soon as Monday, to cool off the downside pressures on the US yields, mentioning that the strong US dollar is a ‘good thing’ in the long-term, while mentioning that Trump’s fiscal plans could not be ‘realistic’.
Mnuchin’s comments gave a positive spin to the falling US yields, yet failed to revive the expectations of a Federal Reserve (Fed) interest rate hike in June. Odds fell to 50%.
It appears that the markets are slowly settling for two additional Fed rate hikes in 2017, yet to happen marginally later in the year than previously thought. In this context, September is a rising option, with 73.3% probability.
This certainly means that the US yields are seeking a bottom, while a recovery should be on the cards. But the question is when and how fast the recovery would happen.
As of now, the softer US yields are expected to encourage a broader allocation in gold holdings, especially given the rising risk aversion due to global geopolitical concerns.
In this context, even if the US yields were to recover in the coming weeks, gold buyers could ignore a slight increase in the opportunity cost of holding the non-interest bearing gold and return to the bullion.
From a technical point of view
Gold cleared 1278.90, the last critical medium-term resistance on July 2016 to December 2016 decline. The gate is open for a further rise to $1315 (minor 76.4% retracement), before considering a more challenging path toward $1375 (July peak).
In the short-run, the downside correction could extend to $1272 (minor 23.6% retracement in March-April rise) and $1257/1255 (major 38.2% retracement / 200-day moving average), which is the critical support to the current positive trend.
Gold futures, ETFs join the rise
Net long future positions advanced nearly to a five month high, just reaching the pre-Trump levels. The current volumes suggests that there is room for larger speculative positions in the gold markets.
The SPDR Gold Shares, the world’s biggest gold ETF (Exchange Traded Fund) is on its way toward its 52-week high ($131.15).