Is There Much Upside Potential For Gold?

Gold prices touched the $2,000 per ounce level on Monday morning, much to the happiness of the bullion dealers in India - just a couple of weeks after the yellow metal was entering a deep cavern. There were a series of factors stacking up against the long side of the yellow metal, such as the surging interest rates along with a strong reversal earlier in March.

But the shine didn’t last for long. Gold prices gave up all of their gains over the past few days, saddening the bullion dealers in India and also the gold dealers in India. The drop in gold prices now sees the yellow metal trading back below a confluence of former highs carved out between November 2020 and January 2021, which consequently served as resistance as recently as late February and mid-March. Financial markets were in a tart mood in thin trade at the start of the trading week. World over bourses was closed for the Easter Monday holiday, driving down liquidity. That may have contributed to outsized moves, which could then struggle for follow-through as participation levels are rebuilt.

As for the bullish factors, once again, there was a pool of bearish factors that jointly contributed to dampening gold prices -

●       Treasury Yields - Gold Price hit the lowest level in five days at $1,944, as it extended its correction from six-week highs of $1,998 reached earlier this week. The relentless surge in the U.S. Treasury yields on heightening expectations of faster Fed rate increases smashed the non-interest-bearing XAU/USD. The 10-year benchmark yields clocked over three-year highs of 2.95%, while the actual rates turned positive for the first time since 2020. Since the pandemic began, the U.S. 10-year real yield is about to turn positive for the first time. Historically speaking, as discussed in the 2Q’22 quarterly gold forecast, rising real yields have a negative correlation with gold prices. Further advances by the U.S. real yields will only make the environment more difficult for gold prices, particularly if the geopolitical risk premium embedded in price dissipates if the Russian invasion of Ukraine begins to wind down.

●       U.S. Dollar - The greenback ended the day higher against the majority of its peers on Tuesday partly due to a rally in U.S. treasury yields along with the rise in U.S. stocks.

●       Crude Oil - Gold prices remained under pressure in APAC trading after falling through the U.S. session. A drop in oil prices appeared to soften demand for inflation-indexed bonds, pushing real yields higher. That may be a function of increased confidence in the Federal Reserve’s ability to engineer a soft landing through their rate-hiking cycle.

●       Rate Hike - Meanwhile, the 2022 Fed rate hike path implied the steepening of the future interest rates. 225 basis points (bps) in hikes are now priced in for this year, implying that three of the remaining six policy meetings this year will bring an outsized 50bps increase. The rates are typically adjusted in 25bps increments.

●       Chinese GDP Data - The world’s second-largest economy grew 4.8% y/y in the first quarter of this year, topping the forecast calling for a 4.2% expansion. The retail sales fell by a greater-than-expected 3.5% y/y in March amid the renewed Covid lockdowns. However, the unemployment rates rose.

Those factors bode poorly for gold prices. Gold continues to hold its own against the firm U.S. dollar and high bond yields. Remarks made by representatives of the U.S. Federal Reserve do not appear to be having any impact on gold at present. That seemingly leaves gold prices without much upside potential at the moment, a neutral stance, for the time being, maybe the most fundamentally prudent approach.