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Gold price fails to hold $1,700 as U.S. Treasuries wrap up worst quarter since 2016

Kitco News

(Kitco News) Gold cannot ignore the rising U.S. Treasury yields, which are wrapping up the worst quarter since 2016. 

The 10-year U.S. Treasury yields hit a 14-month high on Tuesday, climbing to 1.77%. The sell-off in Treasuries has been led by the reflation trade, which is supported by fiscal stimulus and the Federal Reserve's accommodative monetary policy.

Overall, 10-year bond yields have climbed 81.87 basis points since the start of the year. This marks the biggest surge and worst performance since Q4 2016, when Donald Trump won the presidential election and yields rose 84 basis points.

Gold's performance year-to-date has been weighed down by this headwind. "Another spike in U.S. Treasury yields, along with USD strength, weighed heavily on gold," said ING senior commodities strategist Wenyu Yao.

More vaccines and more spending

Accelerating the move in yields this week is the market's anticipation of more stimulus. President Joe Biden is scheduled to speak in Pittsburgh on Wednesday to outline his economic plan, including infrastructure spending and tax hikes. The overall package is expected to exceed $3 trillion.

"The treasury markets are cautious ahead of President Biden's spending plans," said Rhona O'Connell, head of market analysis for EMEA and Asia regions at StoneX. "The markets had expected asset quarter-end asset-rotation to benefit bonds, but thus far the reverse has developed."

On top of that, there is Biden's ambitious 90-90 vaccine plan, which sees 90% of U.S. adults as eligible for vaccines by April 19 and 90% of the population living within five miles of a vaccination site.

"[This is] boosting risk appetite and fuelling hopes that the world's largest economy can recover more swiftly than expected," said SP Angel analyst John Meyer.

Gold tumbles

Gold was unable to hold its key support level of $1,700 an ounce on Tuesday. Year-to-date, gold is down 12.5%. This would mark the first quarterly decline since 2018. At the time of writing, June Comex gold futures were trading at $1,680.30, down 1.86% on the day.

However, it is not just about the yields. The macroeconomic environment that weighs on gold is quite intertwined.

As Treasuries sell off, they push investors towards the safety of the U.S. dollar, which puts additional pressure on gold. The U.S. dollar index reached a four-month high this week on the positive developments in the U.S. At the time of writing, the U.S. dollar index was trading at 93.22.

"It is becoming clear that the mighty dollar is the culprit behind gold's decline. The encouraging developments on the vaccine front in the U.S. have fuelled hopes for a faster U.S. economic recovery, consequently boosting appetite for the greenback. Should the dollar extend gains in the week ahead, this is likely to drag gold prices lower," said FXTM senior research analyst Lukman Otunuga.

The pressure from rising yields is not going away anytime soon, according to TD Securities, which is projecting for the 10-year yields to reach 2% by the year-end.

The only hope for gold is to start diverging from its inverse relationship with yields, said RJO Futures senior commodities broker Daniel Pavilonis.

"Maybe we could start to snap free of the correlation that if rates go up, gold has to go down. If we can deviate away from that with the announcement of Biden's new infrastructure package, it will be good for gold," he said. "When we see inflation, it is time to buy gold."

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