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U.S. dollar is 'the only fly in the ointment' for gold as prices overreach - Mitsubishi

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(Kitco News) Profit takers are threatening further upside in gold as selling pressure mounts after the yellow metal overreached above $1,750 an ounce last week, Mitsubishi said. 

“With gold’s recent rally looking to be stalling, there may be net liquidations in the short term as speculators book profits,” Mitsubishi analyst Jonathan Butler wrote on Monday. “Gold looks as though it may have overreached itself for now at the recent highs of $1,750.”

The profit-taking was already very visible on Tuesday as June Comex gold futures saw double-digit losses, last trading at $1,712.10 an ounce, down $11.70 or 0.68% on the day. 

The U.S. dollar continues to act as a major headwind, stealing safe-haven allure from gold, Butler pointed out. 

“The only fly in the ointment is that the U.S. dollar is also absorbing much of the safe haven flow (the DXY is at a 3-year high of over 100) and equities have staged a strong recovery as investors are cheered by governments backstopping many corporates,” he noted. 

However, working in favor of higher gold prices are the U.S. Treasury yields at rock bottom and real interest rates in negative territory, the analysts said. “This should be a time for gold to shine as a risk haven and a non-yielding asset,” Butler said. 

“And though it is hard to imagine things getting worse with 26 million unemployed in the U.S. and GDP growth having collapsed, any further deterioration in the health and economic picture may see gold pushing even higher,” the analyst added.

This week, markets are carefully watching Wednesday’s U.S. GDP Q1 data followed by the Federal Reserve announcement. The European Central Bank is also scheduled to make its monetary policy decision on Thursday. 

"We are likely to see both the European Central Bank and the Fed give further details on how they plan to disburse unprecedented levels of financial aid – most likely by buying debt and issuing loans to companies and local authorities,” Butler explained. “Gold’s …  recent gains have come on the back of monetary and fiscal largesse in various countries around the world, the consequent collapse in yields, and the longer term inflationary consequences of turning the spending taps on full, plus the ongoing high degree of global macro uncertainty.”

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