US treasury yields continued their ascend on Tuesday, supported by Fed rate hike expectations. EU yields have also climbed over the past week, amidst expectations that the ECB will pivot towards a tighter fiscal policy in order to drive down soaring inflation rates in the Eurozone. Gold competes directly with treasury yields, as it is a non-interest-bearing asset and loses its appeal as an investment when yields rise. Despite the recent rise in real yields however, the gold price has been going up, likely supported by inflationary pressures.
Gold continued trading above the $1,815 per ounce resistance on Tuesday, testing the $1,829 per ounce resistance. If the price of gold continues its ascend, it may find resistance at $1,853 per ounce, while if the price of gold decreases, support may be found at 1,782 per ounce.
Geopolitical tensions support the price of gold, as a risk-aversion sentiment prevails and investors turn to safe-haven assets. An escalation of the Russia-Ukraine crisis might boost the price of gold, although diplomatic talks are continuing with renewed fervour this week, and if they succeed in de-escalating the crisis, gold price might drop. Geopolitical tensions in the region might also serve to drive the price of other commodities up, especially energy-related assets. The EU threatens Russia with heavy economic and trade sanctions in the event of an attack against Ukraine, which might backfire though, and have a heavy impact on the Eurozone. The EU relies on Russia for key commodities, such as wheat, natural gas and oil, and the price of these goods is already increasing. A disruption in importing these commodities would likely result in rising prices, increasing inflation rates in the EU. The increase in oil price in recent months has also been driving inflation up, benefitting gold prices, as the metal is often used as an inflation hedge.
On Wednesday, US and German bond auctions are scheduled, which will display the value of bond yields and are likely to affect the price of gold. Also, this week, a number of inflation indicators are scheduled to be released in the US and may affect the price of gold. Inflation indicators are especially important at this time, as they may help traders gauge the Federal Reserve’s fiscal policy in the coming months.
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