Gold Set For Solid Weekly Gains Despite Higher Yields

Gold (XAU/USD) prices have seen indecisive, two-way price action in recent trade, swinging between the mid-$1940s and $1960s. A sharp rally in US yields to fresh multi-year highs to reflect an upping of hawkish Fed bets as market participants reacted to a chorus of major US banks issues hawkish new Fed policy calls helped push XAU/USD back from weekly highs in the $1960s.

But geopolitical uncertainty, this time regarding the security of Saudi Arabia’s oil infrastructure after a site in Jeddah was hit by a Houthi missile, is helping keep pricing underpinned above support in the form of recent highs in the $1940s area.

At current levels in the mid-$1950s, gold is trading flat on the day and looks set to post a weekly gain of just under 2.0%. That is quite remarkable given that, on the week, the US 2-year and 10-year yields are both up more than 30 bps as markets bet on a much more hawkish Fed tightening path following recent communications from Chairman Jerome Powell and his fellow FOMC policymakers.

Typically, higher yields weigh on gold by raising the “opportunity cost” of holding non-yielding assets. Gold’s resilience speaks to the mood of a market that is unwilling to relinquish inflation protection at a time when the Russo-Ukraine war continues to rage and the subsequent impact on the global economy is not yet known.

The only thing that everyone currently agrees upon is the fact that the war and resultant Western sanctions on Russia are going to be inflationary. With peace talks showing no sign of progress judging by the rhetoric from Russian and Ukrainian negotiators on Friday, it makes sense for a significant degree of geopolitical/inflation risk premia to remain priced into gold.