Gold, XAU/USD, Fed, Treasury Yields, Breakeven Inflation, Real Yields – Talking Points
- The gold price has found firmer footing ahead of the Fed’s meeting this week
- Treasury yields are on the march higher as selling in debt markets continues
- Vigorous US real yields might be ominous. Will they drive XAU/USD under support?
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How to Trade Gold
The gold price is oscillating around US$ 1,900 in the spot market going into Wednesday’s trading session as markets lie in wait for the Federal Reserve’s Jackson Hole economic symposium to get underway on Thursday.
The precious metal has held up reasonably well considering the recent surge in Treasury yields. Yesterday, the benchmark 10-year note traded at its highest yield since 2007, eclipsing 4.36% after dipping to 3.57% in June.
Perhaps of more concern for gold bulls is the uptick in US real yields. The real yield is the nominal yield less the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) for the same tenor. This inflation rate is known as the breakeven inflation rate.
The breakeven rate has been relatively stable over the past month, and this has allowed the real yield to climb. This has potentially undermined the gold price as it does not offer investors and traders a return. In fact, there is a cost of carry for holding the yellow metal.
This brings the focus on nominal Treasury into focus and the outcome from Jackson Hole might be crucial for the gold price going forward.
The US 10-year real yield traded above 2% on Tuesday, a level not seen since July 2009 when the gold price was around US$ 925.
The subsequent collapse in the real through to 2013, saw it go negative to almost -1%.
It was while that move lower was happening in the US real yields that gold roared to it peak of US$ 1,920 in 2011. If real yields continue to blitz higher, the gold price may come under pressure. See the second chart below.
Looking ahead for this week, while there be many Fed speakers will be crossing the wires once the symposium gets underway on Thursday. However, the markets are likely to be more finely tuned to Fed Chair Jerome Powell’s speech on Friday.
SPOT GOLD AGAINST NOMINAL US 10-YEAR TREASURY YIELD, US 10-YEAR BREAKEVEN INFLATION AND US 10-YEAR REAL YIELD
LONG-TERM – SPOT GOLD AGAINST US 10-YEAR REAL YIELD
GOLD TECHNICAL ANALYSIS SNAPSHOT
The gold price recently tested a potential support zone in the 1885 – 1895 area.
In that zone, there are a series of prior lows, a breakpoint, and the 38.2% Fibonacci Retracement level of the move from 1614 up to 2062.
Further down the 50% Fibonacci Retracement at 1838 might lend support.
On the topside, resistance might be at the recent peak of 1897 or psychological level at 2000 where there is also the breakpoint nearby.
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— Written by Daniel McCarthy, Strategist for DailyFX.com
Please contact Daniel via @DanMcCathyFX on Twitter