US Dollar Rally and Rising Yields Dent Gold Price as Debt Ceiling Concerns Ease

US Debt Ceiling

Date- May 30, 2023

The gold price has experienced a significant decline, reaching a two-month low at the beginning of the week. This drop can be attributed to the diminishing concerns surrounding the US debt ceiling, coinciding with rising US yields.

Over the past few weeks, Treasury yields have been steadily climbing across the curve. Notably, the most significant changes have been observed at the short end of the curve. On Friday, the benchmark 2-year bond surpassed 4.60%, having previously dipped to 3.66% earlier in the month. Additionally, the 1-year note reached a 23-year high, briefly touching 5.30%. In March, it stood at 4.03%. These higher rates of return reflect the market’s perception that the Federal Reserve is less likely to implement rate cuts this year. Interest rate swaps and futures markets even project this concept to extend into 2024.

The increased returns from US Dollar-denominated debt have broadly supported the strength of the “big dollar.” As a result, the US Dollar has been reaching multi-month peaks against several currencies. While the commodity complex has generally experienced declines, silver managed to rally on Friday. However, it still ended the week in negative territory, and at the beginning of this week, it remained steady at around US$ 23.30 per ounce.

One of the factors undermining the yellow metal is the rise in US real yields. Real yield refers to the nominal yield minus the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) with the same maturity. The widely watched US 10-year real yield is approaching 1.60%, a level not seen since the regional banking crisis unfolded back in March. When the inflation-adjusted return rises, investors begin to question the outlook for non-interest-bearing commodities such as gold.

The recent steady appreciation of the US Dollar, as reflected in the DXY (USD) Index, may also influence the next move of the precious metal. Simultaneously, gold volatility has been decreasing, potentially indicating that the market is becoming more comfortable with the current pricing.

Technical Analysis of GC1 (Gold Front Futures Contract):

Gold has been following an ascending trend channel since November of the previous year but is currently testing the lower bound of that channel. In early May, it reached a high of 2085.4, surpassing the peak of March 2022 at 2078.8 but failing to overcome the all-time high of 2089.2. This failure to break new ground on the upside has created a Triple Top formation, which is an extension of the previously observed Double Top formation.

As a result, a resistance zone has formed in the range of 2080 to 2090. However, a decisive breakthrough above these levels may indicate evolving bullishness. The next level of resistance could be found near the upper ascending trend channel line, currently positioned around 2160.

On the downside, the gold price currently stands at an interesting juncture, with the ascending trend line being challenged. At the same time, two previous lows coincide with this trend line, along with the 100-day Simple Moving Average (SMA). A clean break below the level of 1930 might trigger a bearish trend, but if these support levels hold, it could suggest that the overall bull run may continue. The price action in the coming sessions will provide important clues for determining the medium-term direction of gold.

In summary, the decline in the gold price can be attributed to multiple factors, including the receding concerns over the US debt ceiling, rising US yields, and the rally of the US Dollar. These developments have led to a decrease in the attractiveness of non-interest-bearing commodities such as gold. The technical analysis indicates that the gold price is currently at a critical juncture, with important support and resistance levels to watch in the near term. Investors will closely monitor these factors to gain insights into the medium-term direction of the precious metal.

Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. The content has been sourced from reputable news sources and is based on available information up to September 2021. CurrencyVeda, as a knowledge provider, does not guarantee the accuracy, completeness, or reliability of the information. Readers are advised to conduct their own research and consult with financial professionals before making any investment decisions.