(Kitco News) - Although gold continues to consolidate below last month’s all-time highs, it is ending the week with solid gains as investors seek alternative safe-haven assets amid growing concerns about the reliability of the U.S. dollar and Treasuries.
The uncertainty actually began late last Friday after the rating agency Moody’s downgraded U.S. debt. In the final minutes of the trading week, gold managed to push through initial resistance at $3,200 an ounce. As this week comes to a close, the precious metal has regained ground above $3,300.
Spot gold last traded at $3,361.21 an ounce, up nearly 5% on the week.
Gold also saw renewed safe-haven demand midweek after the U.S. Treasury held a disappointing 20-year bond auction, which had a domino effect, steepening the long end of the yield curve as 30-year yields rose above 5%.
At the same time, the lack of confidence in the U.S. is evident in the greenback, which is ending the week testing support at 99 points—a three-week low.
“As we look to simplify things as much as possible, in a world concerned about future deficits, interest expenses, increased Treasury issuance, and inflation, higher term premium and curve steepeners are seen as negative for the USD and U.S. equity, and are a reason to buy gold and even Bitcoin—hence the increased short-term relationship between the U.S. 10- and 30-year nominal yield and the USD and gold price,” said Chris Weston, Head of Research at Pepperstone, in a note Friday.
“The long end of the U.S. Treasury curve will likely remain a core focal point throughout next week, and while there will be some focus on U.S. core PCE inflation, the big focal point will be the demand seen in scheduled 2-, 5-, and 7-year Treasury auctions through the week,” he added.
At the same time, gold is not just benefiting from bond market volatility in the U.S. Analysts note that rising bond yields in Japan threaten to further unwind the yen carry trade, which could spark global liquidity issues.
Analysts also observe that gold continues to establish itself as a global safe-haven monetary asset. However, according to some, this also presents near-term risks.
“Gold’s ascent may lose momentum as long as Treasury yields do not see further unruly spikes, and 30-year yields remain capped around the 5% mark,” said Han Tan, Chief Market Analyst at FXTM.
“For the coming week, besides trade and geopolitical developments, gold traders are also set to rely on potential signals stemming from the FOMC meeting minutes, scheduled Fed Speak, and PCE data release to adjust Fed rate cut bets while moving spot gold in tandem,” he added. “Gold may ultimately break out of the $3,000–$3,500 range once the Fed signals greater willingness to resume its rate-cutting cycle.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said gold’s move above $3,355 an ounce could signal an end to its short correction. However, he cautioned that sentiment in the bond market could be overly negative.
“My only concern is that we have reached peak bearishness in bonds and that it could trigger a risk-on move,” he said.
Some bond market analysts have said that next week’s auction could see better participation, as investor demand for shorter-duration yields remains fairly strong.
Looking beyond the bond market, Hansen noted that gold could also attract safe-haven demand after President Donald Trump threatened to raise tariffs on European imports to 50% by June 1.
“Today’s tariff threats from [Trump] were a stark reminder that this trade war is far from over, and the U.S. will suffer the economic consequences, which I see as gold positive,” he said.
In this environment, analysts are also paying close attention to the U.S. dollar as it continues to lose momentum.
“Concerns over trade, fiscal deficits, and growth may be less evident in equity markets when considering the broader market’s impressive recovery from the April lows, but they still appear to be relevant to the dollar. The greenback has struggled to gain traction over the last month as de-dollarization trends continue against a backdrop of rising deficit forecasts and a U.S. debt downgrade,” said Adam Turnquist, Chief Technical Strategist for LPL Financial, in a note Friday. “Momentum and positioning in the dollar remain bearish. A breakdown from the dollar’s consolidation range would not only be technically significant but could also stoke additional fear over the health of the U.S. economy.”
David Morrison, Senior Market Analyst at Trade Nation, said in a note that a weak dollar will continue to benefit gold; however, he urged investors to exercise caution as momentum is currently neutral and price action could go either way.
“With the U.S. dollar still under pressure, and as investors spurn U.S. debt markets due to concerns over excessive debt, there’s still a compelling argument to own gold for safety. But as investors have seen on numerous occasions, a good story doesn’t guarantee anything. A larger pullback in the gold price cannot be ruled out,” he said.
Some analysts note that the U.S. Memorial Day holiday could help ease global market tensions, creating some near-term selling pressure for gold.
Economic data to watch next week:
Tuesday: US durable goods orders, US Consumer Confidence, Reserve Bank of New Zealand monetary policy decision
Wednesday: Minutes from the May FOMC meeting
Thursday: US weekly jobless claims, US Preliminary Q1 GDP, Pending Home Sales
Friday: US Core PCE
