Gold Price Eyes $1,700 as Yields Climb, ETF Outflows Continue (2024)

GOLD PRICE OUTLOOK:

• Gold prices fell as the US Dollar climbed, extending its downward trajectory
• Real yields rose on US infrastructure plan, weighing on bullion prices
• The world’s largest bullion ETF saw continuous outflows as investors turned to riskier assets

Gold prices retreated for a second day as the US Dollar (DXY) index remained elevated alongside longer-term Treasury yields, potentially paving the way for further losses. Gold prices plunged more than 1% on Monday as hedge fund Archegos’ $20 billion forced liquidation sparked risk-off sentiment and sent the haven-linked US Dollar higher. The DXY US Dollar Index climbed to a four-and-half month high of 92.90, exerting downward pressure on precious metal prices. Silver lost 1.6%, platinum retreated 0.93%, and palladium plunged 5.2% on Monday and extended lower during Tuesday’s APAC session.

Looking ahead, Friday’s US nonfarm payrolls report will be closely scrutinized by gold traders as the figure may lead to higher volatility in both currency and precious metal markets. The market foresees 655k new jobs added to the labor market in March as the economy continues to recover from the pandemic. A stronger-than-expected reading is likely to strengthen the growth outlook and hint at a faster pace of Fed rate hikes, potentially leading to a stronger US Dollar. Under this scenario, gold prices are likely to weaken further. The opposite may happen if the data disappoints. The DXY US Dollar index displays a negative relationship with gold prices, with their past 12-month correlation coefficient standing at -0.58.

Gold vs. DXY US Dollar Index – 12 Months

Source: Bloomberg, DailyFX

Meanwhile, President Joe Biden will reveal a massive $3-4 trillion infrastructure and job-creating proposal this Wednesday. This has strengthened reflation optimism and led market to believe that more government bonds will be issued to fund fiscal spending in the future. As a result, the 10-year Treasury yield climbed to 1.744% - a 14-month high. The US real yield (nominal yield – inflation), represented by 10-year Treasury inflation-indexed securities, rose to -0.62% from -0.66% a day ago.

Rising yields may continue to weigh on precious metal prices as the opportunity cost of holding them rises. Real yields exhibit a historically negative correlation with gold, with their 12-month correlation coefficient standing at -0.86.

Gold Prices vs. 10-Year Treasury Inflation-Indexed Security

Source: Bloomberg, DailyFX

The world’s largest gold ETF - SPDR Gold Trust (GLD) – saw continuous net capital outflows over the past few months. The number of GLD shares outstanding declined to 355.9 million on March 29th from a recent high of 407.1 million observed on January 4th, marking 51.2 million shares of net outflow over three months. Gold prices have fallen by 11.8% during the same period, suggesting that capital was fleeing from the yellow metal into riskier assets looking for yield and growth. Gold prices and the number of outstanding GLD shares have exhibited a strong positive correlation of 0.89 over the past 12 months (chart below).

Gold Price vs. GLD ETF Shares Outstanding – 12 Months

Source: Bloomberg, DailyFX

Technically, gold prices broke decisively below a minor “Ascending Channel” on Monday, suggesting that near-term trend has likely turned bearish (chart below). Near-term momentum has flipped downward as the MACD indicator formed a bearish crossover. Breaking below a psychological support level of US$ 1,700 would likely intensify near-term selling pressure and bring the next support level of US$ 1,676 (previous low) into fucus. The overall trend remains bearish-biased as suggested by downward-sloped moving averages.

Gold Price – Daily Chart

IG Client Sentiment indicates that 85% of retail traders are net-long with the ratio of traders long to short at 5.66. The number of traders net-long is 5% higher than yesterday and 1% higher from last week, while the number of traders net-short is 10% lower than yesterday and 21% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are leaning heavily to the long side suggests that gold prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a strong gold-bearish contrarian trading bias.

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter