Rising treasury yields check the ascend of gold

Gold price retreated on Monday from last week’s highs of $2,050 per ounce, falling to approximately $1,950 per ounce. If the price of gold continues to decrease, support may be found near 1,877 per ounce, while resistance may be found at around $2,000 per ounce. Reports of renewed negotiations between Russia and Ukraine on Monday, sparked hopes for a diplomatic resolution to the conflict, putting pressure on the price of gold. 

On Monday, treasury yields rose across the US treasury chest, in expectations that the Fed would tighten its monetary policy in its next meeting later in the week. The 10-year US Treasury yield especially rose above 2%, its highest level since 2019. Germany’s 10-year Bund yield, which serves as a barometer for eurozone borrowing costs, has also been rising since the ECB showed signs of shifting towards a more hawkish monetary policy last week. Germany’s 10-year note continued to rise on Monday, as rising commodity and energy prices increase inflation in the Eurozone, and may force the ECB to take action to tackle soaring inflation. Rising treasury yields on Monday have checked the ascend of gold. Real yields compete directly with gold, which is a non-interest-bearing asset, and their rise puts pressure on the price of gold.

During the past few weeks, the gold price has climbed at its highest level since the peak of the pandemic, in August 2020. The war in Ukraine has triggered a risk-aversion sentiment, driving investors towards safe-haven assets. Sanctions against Russia are driving commodities up, especially energy-related commodities, contributing towards rising inflation. The price of gold benefits from rising inflation, since it is often used as an inflation hedge. 

The effect of rising inflation on gold may be temporary though, as soaring inflation rates may push major Central Banks towards a more hawkish policy. The Fed, the ECB, and the BOE are expected to tighten their monetary policies, boosting the value of real yields and putting pressure on the price of gold. The Federal Reserve and the Bank of England are both expected to raise their benchmark interest rates by at least 25 base points this week, while more rate hikes are expected in the coming months if inflation rates remain high.

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Written by:
Myrsini Giannouli

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