Gold futures are consolidating for a second session in response to a falling U.S. dollar. Dollar and a decline in the U.S. Treasury returns The consistent price behavior signals the market may be preparing for a significant upward move. If one occurs, it will likely be related to a potential intervention against the dollar.
At 05:03 GMT, Comex gold futures for December are trading at $1664.80, an increase of $0.80 or +0.05%. Monday’s closing price for the SPDR Gold Shares ETF (GLD) was $153.45, up $0.47, or 0.31%.
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Yields on 2-year Treasuries Decline as Investors Evaluate Inflation and Earnings
Early Tuesday morning, U.S. Treasury rates are creeping down after dipping in the previous session. The decline is ascribed to the beginning of earnings season, when investors may evaluate the impact of persistent inflation based on company performance. The strengthening financial conditions in the United Kingdom also impact investors. which has been exerting pressure on global bond markets.
Lower yields have a tendency to support gold prices. In this situation, it could spark the beginning of a short-term countertrend rally, but the market’s longer-term trend is likely to be downward due to the Federal Reserve’s widely anticipated rapid rate hikes.
Fears of Intervention and Increasing Risk Aversion Weigh on the US Dollar
Additionally, a weaker U.S. is bolstering gold prices. Dollar. A number of factors, including the fear of intervention by Japanese authorities or, even worse, a coordinated intervention by a number of major central banks, are exerting pressure on the greenback. As a result of a change in risk sentiment, investors who purchased the dollar as a safe-haven asset are liquidating their long positions.
A weaker dollar is also positive for gold prices since it tends to increase demand from foreign currency holders.
As long as the U.S. economy remains weak, gold prices could continue to rise in the short term. Dollar remains weak, and Treasury yields cease to rise. Long-term, however, the prognosis will be negative due to the Federal Reserve’s impending aggressive interest rate hikes.
An aggressive intervention by a number of central banks is one circumstance that might generate a massive short-covering rise in gold. Traders are now anticipating an intervention from Japan, but other central banks whose currencies have been harmed by the dollar’s strength could join them.
Following the latest Group of Seven meeting, Japanese Finance Minister Shunichi Suzuki confessed that “there was no debate on what coordinated steps may be taken” about currency volatility. However, this does not indicate that it is no longer an option.
The United States Opposes Coordinated Intervention
The United States has made clear that it will not support a coordinated action. U.S. Janet Yellen, the secretary of the Treasury, has stated multiple times that Washington has little stomach for joint action.
This is precisely why gold traders must remain vigilant. Long U.S. equities are exposed to downside risk due to the element of surprise. Dollar investors and speculative gold buyers hold upside potential.
Other than a tentative transaction in the Japanese Yen, we have not seen any indications of an intervention. Gold prices have not gone below the trough reached on September 28, a few days after Japan’s initial intervention. In addition, the low of $1622.20 was unaffected by the U.S. inflation report and the near-certainty of a 75-basis-point rate hike by the Federal Reserve last week.