Gold prices are beholden to bond yields

GOLD prices recovered some dignity this week after breaking below the daunting US$1,700 an ounce barrier, and gold is set to finish the week on a sober note.

Gold had slumped to a nine-month low below US$1,680 earlier in the week, pressured by gains in global government bond yields and the US dollar. The yellow metal rebounded mid-week above the psychological US$1,700 mark as reports ticked in about drone and missile attacks on Saudi oil installations over the weekend, which enabled gold to regain some of its safe-haven status.

US Treasury and German Bunds yields also retreated from recent highs, with solid demand seen for the US Treasury's US$58 billion auction of three-year T-notes. Gold prices closed more than 2 per cent higher when the auction was well received.

The dollar edged lower mid-week and provided traction to bullion following a tame US inflation report, while commodity currencies like the Australian dollar rose on improving global growth prospects. Commodity currencies have a positive correlation with gold. Precious metals also had support as US President Joe Biden's US$1.9 trillion Covid-19 relief bill won final approval on Wednesday.

One key theme of the week was the conclusion of the monthly meeting of the European Central Bank (ECB), where the bank announced plans to ramp up the pace of its bond purchases, which was seen as a bullish factor for precious metals.

Still, recent higher bond yields remained a headwind for gold. The roll-out of one-shot vaccines has further boosted optimism for recovery and reduced safe-haven appeal. The recent record surge in Bitcoin also challenged gold's status as a store of value and portfolio diversifier.

Next week, investors would be focusing on the Federal Reserve's two-day policy meeting.

Technical analysis for Comex April Gold Futures (GCJ21)

Daily technical indicators have been reflecting a bearish dominance since the first week of January 2021 when gold prices broke below US$1,900. Bears have further strengthened their hold of the gold market ever since the failure to trade above the pivot of US$1,860. Prices drifted lower and breaking through the psychological US$1,700 last week was not too much of a hassle as rising bond yields took away gold's appeal.

The benchmark Comex GC April had dropped below US$1,700. The US$1,700 is an important psychological level as it signifies almost 60 per cent of retracement of the gold bull run, from the March 2020 low of US$1,450 to the August high of US$2,070.

Gold prices regained some composure above US$1,700 this week but could not break higher than US$1,740. Prices need to break higher through previous support turned resistance at US$1,760 to lead credence to higher prices ahead, as currently it seems that the path of least resistance is lower.

A significant collapse of prices from US$1,700 would take prices to the next support of US$1,660. A breach below the level would force another round of long liquidation which could carry prices to US$1,500 in the absence of other supporting factors.

Immediate resistance is at US$1,760, US$1,860 followed by US$1,900.

• The writer is senior manager, commodities, Phillip Futures