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First bond yields, now U.S. dollar weighing down gold around $1,700 - analysts

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(Kitco News) - It's not just rising bond yields that the gold market now has to contend with. Analysts are warning that new momentum in the U.S. dollar is another challenge for the precious metal.

According to some market analysts, positive investor sentiment that the U.S. economy will see a stronger-than-expect recovery is pushing the U.S. dollar index above 91, its highest level in four weeks.

Meanwhile, the gold market struggles to attract new investment capital, with prices only marginally off their session lows just above $1,700 an ounce. April gold futures last traded at $1,725.50 an ounce, up 0.15% on the day.

Some economists note that the new dollar rally is coming after the U.S. House passed the $1.9 trillion stimulus package late Friday. There are expectations that the new fiscal stimulus plan will provide a further boost to economic growth that has been devastated by the COVID-19 pandemic. However, the latest stimulus bill still has to be passed by the Senate.

While the latest stimulus measures are bullish for gold in the long-term as they are expected to push inflation higher, analysts note that the precious metal has to contend with the shifting growth expectations.

Analysts at Heraeus Precious Metals said that they remain bullish on gold in the long-term in a report Monday. Still, they added that storm clouds, due to a strengthening U.S. dollar, are brewing on the horizon.

"Gold has looked lackluster compared to other precious metals recently, but its lower volatility is a reason to hold it in a portfolio. An improving economy in the key markets of China and India this year is also expected to support a rebound in consumer demand for gold, but dollar strength remains a serious threat to the price," they said.

The European precious metals company said they are troubled about the extreme bearish speculative positioning in the U.S. dollar.

"The concern is that when positioning is this one-sided, the trend is usually near its end and a reversal is not far off," the analysts said. "At this stage, easy fiscal and monetary conditions are priced in to gold. On this basis, any rumored shift to tighter conditions in the U.S. could strengthen the dollar, which is negative for gold."

Currency analysts at T.D. Securities said that along with positive domestic news, the U.S. dollar is getting a lift from growing economic turmoil in Europe.

"We maintain a fairly downbeat outlook for the EUR. With the region's economy still deep in the doldrums, we think the EUR will lag its peers. The euro area continues to underperform on its vaccine rollout program and the ECB is becoming more vocal against risks of tighter financial conditions," the analysts said in a report. "If the current data trajectory continues, we think the USD could see further tailwinds emerge in the days ahead."

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