Headwinds from the dollar and bond yields buffet gold

A weekly market summary for gold, March 22-26

GOLD prices had a boring week and were set to close where they started trading this week. Prices were hemmed in a tight range of US$25 by a strengthening dollar and bond yields easing from recent highs. While comments from the Federal Reserve and other central bankers had been supportive, gold prices have succumbed to lethargy with the push and pull of mixed fundamental factors.

The precious metal has lately been ignored by traders in the hype over the appreciation of bond yields, falling crude oil prices and the unexpected recovery of the dollar despite pundits harping about how structurally weak the dollar is.

The strengthening dollar had in fact started the week by pressuring gold prices. The Turkish lira plunged about 15 per cent over the last weekend and boosted the dollar. Turkish President Recep Tayyip Erdogan had replaced his central bank governor following a spatover raising interest rates over the last weekend.

Meanwhile, the number of Covid-19 cases rose in Europe, especially in the largest member of the bloc, Germany, with fears that it is facing a third wave.

Gold traders virtually ignored the prospects of the European Central Bank coming up with additional stimulus measures. They were keenly focused on rising 10-year T-note yields which rose above 1.7 per cent, the highest level in 14 months.

Another highlight of the week was emerging news reports over another huge fiscal stimulus being worked out by the White House. Yet many questions remain about how to structure and pay for any infrastructure or climate-change-related bill, and which Republicans in Congress might be willing to support it.

Technical analysis for Comex April Gold Futures (GCJ21)

Gold's technical picture had increasingly been dominated by bears, with the path of least resistance being lower. Price action of gold as recently as in February does reveal that bears are still able to hold their ground at the key resistance of US$1,760. Prices therefore need to challenge the daunting US$1,760 level, which is a former support-turned-resistance, to move gold higher.

Gold prices had in fact this week recovered considerably given the ongoing pressure from elevated yields and a strengthening dollar. Intraday gold prices had mixed trading since touching a most recent high on Thursday last week of US$1,754.2, drifting lower in a bullish pennant with prices supported at US$1,720 an ounce.

With a bearish technical picture, gold bulls need to see prices trading above US$1,760 before being convinced that the rebound off the recent low of US$1,673 was not a dead cat bounce and that a low has indeed been formed below US$1,700.

At the time of writing, minor support for the benchmark GC April contract situated at US$1,720 an ounce had not been breached although prices were traded close by.

A significant collapse of prices from the recent low of US$1,673 would take prices to the next support level 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 any other supporting factors.

  • The writer is senior manager, commodities, Phillip Futures

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