Gold prices end higher on retreating US Treasury yields

Gold prices ended higher Tuesday, partially buoyed by declining US Treasury yields, after the most-active futures contract briefly touched its lowest level since March overnight.

Gold found support Tuesday from a retreat in US Treasury yields. Gold prices have retreated for most of May as the dollar has strengthened and Treasury yields have risen month to date, partly driven by the lack of progress on a US debt ceiling deal in Congress, though an deal announced Saturday night allowed bill yields to ease Tuesday.

It looks increasingly likely that Congress will pass a debt deal to prevent a default. Over the weekend, President Joe Biden and House Speaker Kevin McCarthy reached a deal to raise the US federal government’s debt limit. The deal must now pass both chambers of Congress, where it is expected that centrists from both parties will band together to pass it.

Investors’ required rate of return has thus fallen by holding US government debt, as the risk of default has fallen in their eyes. This is reflected in falling bond yields. As yields dip, up goes the appeal of zero-yielding assets on a relative basis. The yield on the 10-year Treasury note was off by 10.7 basis points at 3.697% in Tuesday dealings.

However, expectations for another interest rate rise from the Federal Reserve in June have risen after Friday’s U.S. inflation data. The dollar has risen over the past month, but a closely watched gauge of the greenback’s value against major currencies was trading slightly lower on Tuesday. The US Dollar Index was off slightly at 104.18.

Weakness in the dollar can provide support for dollar-denominated prices of gold. Overall, a resurgent dollar and relief that a US debt ceiling deal has finally been reached have left their marks on gold, which sliced below the $1,935/oz region earlier today to hit its lowest levels in six weeks.

It is a troublesome environment for bullion, as the steepening of the Fed’s implied rate trajectory has simultaneously turbocharged the dollar and propelled Treasury yields higher, both of which make the nonyielding metal that is denominated in US dollars less attractive.

Gold futures remain lower month to date though prices did reach their second-highest settlement on record in early May. In order for gold to reach a new record high, that would require signs of weakness in personal consumption and employment.

In the face of obvious weakness in the real economy, there would be tremendous pressure on the Fed to become more accommodative. The Fed would be under pressure to be less concerned about inflation. However, continued reports of a strong labour market in the US would result in a tighter for longer Fed, which would likely pressure the gold price in the short term. It is noteworthy that the monthly US employment report will be released Friday and traders do surely await this key data for direction.