Gold – Higher yields weigh heavily

Strong recovery comes at a price

Rising bond yields are bad news for gold , which is trending lower as borrowing costs continue to spike.

A strong global economic recovery comes at a cost and what we’re seeing in bond markets is indicative of investors belief that the recovery is going to be very powerful indeed and bring with it inflation . The Fed and others have sought to play down the inflation risks and while Jerome Powell said all the right things in Congress this week, it’s made little difference as we’re seeing today.

With yields rising across the board, the greenback has not been the main beneficiary of this and, in fact, the dollar index has slipped below 90 which could be a worrying sign for it. But that’s not doing much to save gold , which is also falling today, down 1.5%.

The outlook is not looking too bright for the yellow metal and we’re now seeing it test some key support levels around $1,765. Unfortunately, it’s not lacking momentum so they may not prove to be an enormous stumbling block. And the yield run doesn’t appear to be slowing either.

In the longer run, the next big test for gold is $1,660. It traded between here and a $1,760 for much of the second quarter of last year. It may see some initial support around $1,740 and $1,700 as well.

While gold could rebound if central banks can arrest the rise we’re seeing in yields, it’s not looking that likely at the moment. We’re not in taper tantrum territory, so they may not feel they have to. They may view this as an acceptable move in response to a strong recovery environment.

Should it find some support sooner, then $1,850 remains the big test. A cluster of moving averages could make life difficult around that region. $1,800-1820 could also prove a challenging test.

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