A rebound in the U.S. Dollar is putting a lid on gold prices early Tuesday. However, the market is being underpinned by a plunge in U.S. Treasury yields. It sounds contradictory, but it’s happening on the strength of safe-haven buying.
Global stock market weakness early Tuesday is driving up demand for safe-haven U.S. Treasurys. This is driving yields lower. Typically, this puts pressure on the U.S. Dollar, but not when there are expectations of heightened volatility in the equity markets.
At 1010 GMT, December Comex Gold is trading $1223.00, down $2.30 or -0.19%.
So it’s safe to conclude that gold traders are paying more attention to the movement in the U.S. Dollar rather than the direction of interest rates today.
There are times when declining yields will bring buyers into the gold, but this typically occurs when falling rates drives the U.S. Dollar lower. This happened last week when rates and the dollar fell as investors reacted to concerns from Fed officials over the weakening global economy.
In other news, helping to underpin gold on Monday were cautious comments by several Federal Reserve officials recently over the global economy and weak domestic data raised questions over whether the U.S. central bank will slow down the pace of its rate increases.
Late Monday, New York Fed President John Williams told a Q&A event that “We will be likely raising interest rates somewhat, but it is really in the context of a very strong economy.”
Williams also said the Fed is not on a pre-set course and will adjust monetary policy to keep the economy strong with low inflation.
Williams’ comments come on the heels of last week’s remarks from Fed Vice Chair Richard Clarida and Dallas Fed President Robert Kaplan, who raised concerns over a potential global slowdown.
Gold was also supported by surprisingly weak housing data, which pushed down U.S. 10-year bond yields. U.S. homebuilders’ sentiment recorded its steepest one-month drop in over 4-1/2 years, suggesting that rising borrowing costs are squeezing the real estate sector.
A potential shift in the interest-rate cycle has some gold traders increasing bets that the Fed will begin to slow the pace of its rate hikes. This is helping to underpin gold, however, the news isn’t strong enough to trigger a breakout to the upside. This is because the dollar is now strengthening due to safe-haven buying.
There was no fresh data from Japan on Tuesday. On Wednesday, investors will get the opportunity to react to U.S. data on Building Permits and Housing Starts at 1330 GMT.
Building Permits are forecast to have risen 1.26 million units. Housing Permits are estimated to have risen 1.23 million units.
The housing numbers will be watched closely by traders because of their impact on the economy and future Fed policy. Weak data will likely continue to limit the dollar’s gains which would be supportive for gold because it may reduce the chances of at least three Fed rate hikes next year.
Further selling pressure on U.S. stock indexes will drive investors into the U.S. Dollar for protection so this will likely put a lid on gold prices.
Because of the contradictory fundamentals, we’re looking for a sideways trade with no real bias at this time.