Gold, XAU/USD, US Dollar, FOMC, Treasury Yields, Real Yields, US CPI – Talking Points

• The gold price might be at a crossroads with potentially conflicting signals
• The US Dollar appears vulnerable, but US Treasury yields remain high
• US CPI this week could provide some directional clues. Will XAU/USD break out?

The gold price has started the week holding onto the gains seen on Friday when the US Dollar slid lower across the board.

The Dollar weakened despite Treasury yields continuing their march higher with the benchmark 10-year bond trading near 4.10%, a long way from the low of 3.25% seen in April.

The policy-sensitive 2-year note yielded over 5.10% last Thursday for the first in 16 years before dipping to 4.75% on Friday. It is now back above 4.90%.

The bumpy ride was indicative of the data points along the way as well as the Federal Open Market Committee (FOMC) meeting minutes revealing a more hawkish board than the market had previously perceived to be the case.

The interest rate market now weighs a 25 basis point hike by the Fed on the 26th of July at over 80% probability.

Of potential concern for gold bulls is the run-up in US real yields. The real yield is the nominal yield less the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) for the same tenor.

The 10-year inflation-adjusted return for Treasuries yielded over 1.82% on Friday. The last time it traded at these levels in 2009, spot gold was below US$ 1,000. A rising real yield in Treasuries offers an increasing return against the prospect of holding a non-yielding asset, like gold.

Of course, a lot has changed since then but US CPI on Wednesday will be closely watched to see if the Fed’s tightening continues to have the desired impact on inflation. A Bloomberg survey of economists is looking for year-on-year CPI to print at 3.1% to the end of June, against 4.0% prior.

The driving force pushing real yields higher has been the increase in nominal yields, with inflation expectations appearing to remain anchored for now, as shown in the chart below.

For gold traders, keeping an eye on US yields might be worthwhile for clues on possible directional signals.

GC1 (GOLD FRONT FUTURES CONTRACT) AGAINST US 10-YEAR TREASURY NOTE, 10-YEAR BREAKEVEN INFLATION RATE AND 10-YEAR REAL YIELD

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter