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'Perfect storm' for gold bulls: Bond market and bearish outlook for U.S. dollar - Pepperstone

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(Kitco News) The bond yields along with a weaker U.S. dollar outlook might be what gold needs to finally break out of the $1,650-$1,750 range, according to Pepperstone head of research Chris Weston.  

Real Treasury yields have been promoting a bid in gold, said Weston in his latest research note.  

“For now, though we see a solid move lower in nominal yields, with the Fed importantly managing to generate a positive move higher in inflation expectations, with 5-yr Breakeven rates moving +3bp and above 1% for the first time since 9 March. This has resulted in US 5-year real Treasury yields collapsing 11bp to -70bp,” he wrote Thursday. 

This is big for gold traders, especially when combined with a bearish outlook for the U.S. dollar, Weston added.

“For gold traders, this is all that matters and for gold bulls, it is the perfect storm, especially when married with such as the bearish trend in the USD,” he noted.

Pepperstone’s outlook for the U.S. dollar includes losses in the longer term due to Fed’s current and possible future monetary policy actions.

“The U.S. is no longer the standout and almost isolated destination for global savings that it has been in recent years, and investors now have a choice and have redistributed capital accordingly,” Weston explained. 

“Lower yields are certainly incentivising an offer in the USD too, especially with raised prospects of YCC the months ahead. Why? Because if the Fed is going to add an extra measure to further increase its balance sheet through unlimited bond purchases, to fix a specific parts of the Treasury curve at a given yield, then it just increases the prospect of deeper negative real yields and an ever bigger balance sheet,” he added.  

Gold prices have been stuck in a range between $1,650 and $1,750 for the past two months and the above combination might be what it takes to break the yellow metal out, Weston pointed out. 

“Gold has been happy to track the $1,750 to $1,650 range since mid-April, and I have argued many times, the answer lies in the bond market and it appears to be playing out - Is this the time we finally see a solid break of the range?” Weston said.

The Federal Reserve’s dire economic outlook seems to be ruling out a V-shaped recovery, which is improving the outlook for gold. 

On Wednesday, the Fed announced that it is keeping its key interest rate unchanged at a range between zero and 0.25% while signaling no rate hikes through 2022. The Fed also said it expects U.S. GDP to contract by 6.5% this year. 

In response, gold prices rallied, reaching slightly above $1,750 an ounce on Thursday while equities saw major losses. At the time of writing, gold has given back some of its earlier gains with August Comex gold futures last trading at $1736.40, up 0.91% on the day.

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