Rising Yields, Weaker Crude Sink Gold
The gold market is getting the week started off on the wrong foot as prices are moderately weaker at lunchtime Monday. Spot gold is down over $20 per ounce around $1937 as higher bond yields and sharply weaker oil prices take a toll. Today’s declines may also simply be due to a pullback within an uptrend and some back and fill price action on the chart. Whatever the case may be, the yellow metal is weaker today and could be seeing some effects from an increasingly hawkish policy stance by the Fed. The central bank is now expected to raise rates at its May meeting by 50-basis points rather than 25. Another 50-point hike could follow the first in May, possibly allowing the Fed to get a hold on rampant inflation.
In addition to worries over a hawkish Fed and the ongoing war in Ukraine, markets may also be feeling some concerns over the rolling Chinese lockdowns due to Covid. The major city of Shanghai has now been placed in a rolling lockdown, and some companies have been forced to halt production in the area. The Chinese lockdowns could be a contributor to oil’s weakness today and may weigh on commodities across the board if not ended soon.
The benchmark 10-year Note is now fetching a yield of over 2.45%. Rising yields may become increasingly problematic in the months ahead. Some parts of the yield curve have already inverted, suggesting that a recession could be approaching in the U.S. Worries over slowing economic growth and the potential for a full-blown recession are likely to increase significantly in the months ahead as the Fed battles inflation with higher interest rates. The central bank’s hawkishness could fuel market volatility and some major sell-offs even without a recession. Investors are likely to view tightening monetary policy as a precursor to a major economic slowdown, and as such, may elect to jump ship from equities and risk assets earlier as opposed to later in the cycle. This could keep stocks in a “sell the rallies” type of environment and trending lower as the year progresses.
Gold may play an increasing role in the Russian/Ukrainian war. Since it annexed Crimea in 2014, Russia has tripled its gold holdings. While Western sanctions have frozen a large part of Russia’s reserves, gold is seemingly beyond the reach of sanctions-at least for now-and may be used to keep money flowing in Russia. The U.S. and other nations are looking to close this loophole, however, and the Treasury Department has said that anyone transacting gold held by the Russian Central Bank could face penalties.
The bulls remain in control of the daily chart. The $2000 level remains the next logical target on the upside. The bears will seek a further decline to produce a close below the $1900 level. Price action in between these levels may just be noise. A legitimate breakout to the upside could be seen soon, however, barring any major news events or policy changes.