Gold prices collapsed on Wednesday, pressured by the strong U.S. Dollar and the jump in U.S. Treasury yields. Gold traders also continued to react to solid economic data from earlier this week that indicates the economy is growing at a robust pace. Traders are also selling in reaction to the easing of tensions between the United States and China over trade.
On Wednesday, June Comex Gold futures settled at $1322.80, down $10.20 or -0.77%.
If you don’t know by now, gold is a dollar-denominated assets that tends to go down when the dollar rises because of lower demand from foreign buyers. In other words, gold gets more expensive to foreign buyers when the dollar increases in value.
Additionally, gold is also a store of value during turbulent times. However, it doesn’t pay a dividend or interest so while tensions over geopolitical events ease, it tends to fall because no one is getting paid to own it.
To recap some of the events from this week that are pressuring gold prices, rising U.S. Treasury yields pushed the dollar higher against a basket of major currencies. This move encouraged gold investors to dump their long positions and speculators to short the precious metal. The dollar index hit a four-month high while the benchmark U.S. 10-year Treasury yield rose to its highest in more than four years.
The catalysts driving yields higher are worries about the growing supply of government debt and inflationary pressures from rising oil prices.
Gold is trading higher early Thursday in reaction to slight weakness in the U.S. Dollar. Short-covering in the Euro ahead of today’s European Central Bank interest rate decision and monetary policy announcement is helping to weaken the dollar.
In the U.S., traders will get the opportunity to react to the latest data on Durable Goods, Weekly Unemployment Claims, Goods Trade Balance and Preliminary Wholesale Inventories.
Essentially, rising U.S. Treasury yields and U.S. Dollar should continue to put pressure on gold prices. However, we could see some short-covering and position-squaring if the U.S. data misses their mark or if investors decide to book profits ahead of Friday’s U.S. GDP report.
Additionally, the ECB could fuel a rally in gold if its monetary policy announcement comes out on the hawkish side.