Gold had its best weekly performance since December, as US inflation risk, lower bond yields, and a weaker dollar index helped set the yellow metal on a possible return course to $1,800.
The market action suggests that investors have bought into the Federal Reserve’s call for a surge in economic growth while keeping interest rates at historically low levels until the economy stabilizes. Bond yields in the United States, as calculated by the 10-year Treasury bill, were hovering about 1.58 % on Friday, down from a 14-month high of 1.77 % on March 30.
The Federal Reserve’s decision to keep interest rates down has put downward pressure on US bond yields. Bond yields and gold prices are inversely related. This is because as bond yields rise, the opportunity cost of owning gold rises, and money flows from gold to bonds. As the bond yield falls, the reverse flow will occur.
The Commerce Department reported on Friday that homebuilding in the United States soared to a nearly 15-year high in March, adding to the previous day’s strong retail sales numbers, implying the economy is roaring. This has increased inflationary fears in the economy. Inflation and gold prices are intrinsically tied. Investors see gold as a hedge against inflation.
Adding to gold’s strength was a weaker dollar, which typically boosted the yellow metal. On Friday, the Dollar Index, which measures the greenback to six major currencies, closed at 91.544. This is a drop from the current week’s peak of 92.365.
All these factors are having a positive impact on gold prices. On a technical level, gold is trading well above its hourly and four-hour moving averages. This suggests that the market will continue to strengthen in the near future. However gold is still trading below daily moving averages.
Hourly chart:
4-hour chart:
Economic events that can impact gold prices in the coming week:
April 22nd:
17:15 IST: ECB Monetary policy statement. European Central Bank Monetary Policy Statement contains the outcome of the ECB’s decision on asset purchases and commentary about the economic conditions that influenced their decision.
17:15 IST: ECB Interest rate decision. The European Central Bank publishes its decision on where to set the benchmark interest rate. As short term interest rates are an important determinant of currency valuation, traders watch interest rate changes closely
18:00 IST: Initial Jobless Claims measures the number of people who filed for unemployment insurance for the first time during the past week. This is the most timely U.S. economic data, but the market impact varies from week to week.
19:30 IST: Existing home sales (March) and Existing home sales (MoM March). Existing Home Sales measures the change in the annualized number of existing residential buildings that were sold during the prior month. This report helps to gauge the strength of the U.S. housing market and is an important indicator of overall economic strength.
Gold is expected to continue its run higher. Gold rates can be influenced favorably by factors such as the European Central Bank’s lower interest rate and higher home purchases in the United States. However, the decision to impose a lockdown in India in response to a second COVID-19 wave may have a negative effect on gold as it affects the demand for gold from India.
Note: This analysis is for educational purposes only and should not be relied upon for any other use.
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