Gold price forecast: XAU weighs yields, US dollar, Fed path amid crude oil pullback
Gold prices slightly lower after an overnight drop on US stock rally; a rise in real and nominal yields is sapping XAU/USD appeal and US dollar continues to push higher on US yield advantage.
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Gold prices remain under pressure in APAC trading after falling through the US 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.
Those factors bode poorly for gold prices. The avoidance of a recession would likely keep equity prices afloat. Gold may lose some of its appeal as a volatility hedge in that scenario. The Nasdaq 100 index rallied overnight, but technology stocks are off to a bumpy start for earnings season. Bullion prices may see renewed upside if earnings through the rest of the week fail to impress.
Meanwhile, the Fed’s aggressive outlook continues to push traders out of Treasuries as the chance of a 50-basis-point (bps) rate hike at the May FOMC meeting firms up. Currently, overnight index swaps (OIS) are pricing in the first set of consecutive 50bps hikes since the early 1980s. This is driving nominal yields higher, widening the US yield premium versus other major economies.
The US dollar has benefited greatly from that premium, with the DXY index hitting its highest level since March 2020. A stronger USD is typically seen as a headwind for the yellow metal. That seemingly leaves gold prices without much upside potential at the moment. However, traders may not be too keen to sell XAU just yet, as the economic backdrop policy bets (and thereby yields) remains highly precarious. Taking a neutral stance for the time being may be the most fundamentally prudent approach.
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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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