03.03.202112:55 Forex Analysis & Reviews: Gold takes breather after rally and looks for further direction

On Wednesday morning, the yellow metal moved slightly lower after a solid rise on Tuesday amid a fall in the US dollar.

Thus, the price of gold futures for April on COMEX slipped by 0.1% to $1,733.5 per troy ounce. Meanwhile, May silver futures fell by 0.41% to $26.77 per ounce.

A day earlier, gold futures for April posted an increase of 0.6% to reach $1,733.60 after five consecutive sessions of decline. The main reason to support gold prices was the fall in the US dollar against other majors. As a rule, a weaker US dollar makes the precious metal more affordable for the owners of other currencies.

According to the COT report, gold had been trading in negative territory for two weeks in a row and broke through the psychological level of $1,800. Further upside potential was seriously restrained by a record increase in the yield of US government bonds. Traditionally, a positive dynamic in the US Treasury yields leads to a strengthening of the US dollar, which strongly affects gold. So, last week, the US Treasury yields hit a yearly high and rose to 1.61%. Later, the indicator dropped to the level of 1.4%, remaining close to the peak levels. According to the US Department of Labor, these figures are fully consistent with the rise in consumer prices in January compared to the same period in 2020. This means that inflation offsets all the gains even though the yields have significantly increased.

In this regard, analysts predict that gold will skyrocket following the rise in consumer prices as soon as a new stimulus package is adopted. Until then, investors have a great opportunity to buy gold at competitive prices.

Market participants continue to monitor the situation around the new support program for the US economy. Last weekend, the House of Representatives approved a $1.9 trillion stimulus package. The bill must be then approved by the Senate and later signed by President Joe Biden.

Experts suggest that the long-term drop in gold is over. They point out that the outlook for the global economy remains uncertain. So, the bond market may soon see another round of sell-off in the short term even though the central banks are concerned about the continues growth of government bond yields.

Yesterday, the Reserve Bank of Australia announced its plans to continue the bond buying program. Meanwhile, the Governing Council of the ECB said it was necessary to prevent an increase in the slope of the nominal yield curve. At the same time, the US Federal Reserve expressed its agreement with other central banks, so gold can regain ground in the very near future.

In addition, representatives of the Fed suggest that rising US Treasury yields signals a positive outlook for the global economic recovery. A large-scale vaccination program against COVID-19 and the possibility of additional support from the government add to the optimistic sentiment.