The gold market is lower today as traders return from the long holiday weekend. As the benchmark Dow Jones Industrial Average craters by over 600 points in early afternoon trade, the gold market is not faring much better. Spot gold prices are currently down about $8 per ounce as the day session comes to a close. Keener risk aversion is also not giving gold much of a boost today, as some traders may be forced to liquidate gold positions in order to meet equity margin calls.
The story of the day for gold, however, is the continuing rise in treasury yields. The two-year note is now fetching over 1% today, while the benchmark 10-Year treasury is now yielding some 1.856%, the highest yield seen in some two years. The dollar is also seeing a strong rebound today after hitting a two-month low last week. The combination of dollar strength along with higher yields is likely causing some gold investors to hit the sell button.
In potentially bullish news, China has cut its main interest rate to boost economic activity. The Chinese action comes at a curious time, as other global central banks are now in the process of tightening their monetary policies. Chinese President Xi Jinping has also warned other nations not to raise rates too aggressively, as doing so could put the global economy on thin ice.
The crude oil market is also pushing higher today following the recent drone attack on the United Arab Emirates. Although the damage was limited, the attack has reminded the world how fragile the crude market can be and how producers are vulnerable to drone attacks. The higher oil price may benefit gold in the days ahead, and if oil approaches the $100 per barrel level, it would likely fuel further inflation talk and concerns over rising price pressures.
In addition to the UAE drone attack, North Korea is again testing missiles today in what could become a major standoff as the U.S. and its allies look to control the nation’s nuclear capabilities.
Despite today’s selling in gold, the bulls still have the near-term advantage on the daily chart. The next upside target for the bulls is to produce a close above solid resistance in the $1840-$1850 region. The bears, on the other hand, will continue to target more downside in the hopes of driving the metal below support in the $1775 area.
The next several weeks are likely to be key for gold in the year ahead. The possibility of a rate hike coming as soon as March, as well as an increasingly aggressive Federal Reserve, could keep the gold bulls guessing. Despite thoughts to the contrary, the period of rising rates could be highly bullish for gold, as the yellow metal has shown a tendency to rise during previous tightening cycles. Whether that proves to be the case this time around is anyone’s guess, but it seems that markets are likely to find out before long and that could dictate price action for the remainder of the year.