SPOT GOLD PRICE – TALKING POINTS
- Gold jumped to $1,324 while the US 10-Year Treasury Yield dropped to its lowest level since December 2017
- The recent ascent in XAUUSD appears to be driven by investors piling back into the anti-risk asset in response to a deteriorating global growth narrative
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The price of gold has risen to its highest level since February and pushed XAUUSD month-to-date performance back into positive territory. Gold has gained nearly 2 percent since prices based on March 7 as global growth forecasts continue to be revised lower. The Federal Reserve stoked the market’s latest flare-up of pessimism last Wednesday when the FOMC released updated economic projections that cut 2019 GDP growth estimates from 2.3 percent to 2.1 percent.
SPOT GOLD (XAUUUSD) PRICE CHART: 4-HOUR TIME FRAME (FEBRUARY 19, 2019 TO MARCH 25, 2019)
Although equity investors initially celebrated the Fed’s latest dovish position and easy-money monetary policy, risk assets have since come under pressure as markets attempt to gauge whether the economic slowdown is temporary or if a recession is right around the corner. It appears that sentiment is souring, however, judging by soaring US Treasuries. In fact, the yield on US 10-Year Treasury Notes plummeted from a high of 2.63 percent last week down to 2.42 percent today – its lowest level since December 2017.
Moreover, CME data shows the futures market is now pricing in a 75 percent chance that the Fed cuts its policy interest rate by the end of this year. A lower yield trajectory puts pressure on real interest rates which in turn boosts the relative attractiveness of holding gold considering the precious metal is a zero-yielding asset.
SPOT GOLD (XAUUSD) VS US 10-YEAR TREASURY YIELD PRICE CHART: DAILY TIME FRAME (DECEMBER 31, 2018 TO MARCH 25, 2019)
Although long-term rates have dropped significantly, a non-parallel shift in the yield curve – a ‘flattening’ where short-end rates are rising faster than long-end rates – hascaused portions of the US Treasury yield curve to invert. Notably, the 3m10s yield curve just inverted and is significant due to this event signaling a recession in the US within the next 24 months seven out of the last 7 times.
Consequently, this combination of lower long-term interest rates and increasing recession risk has bolstered gold prices. Now with XAUUSD looking like it has reasserted its claim above technical support near the $1,300 price level, the recent parabolic climb has potential to continue. Nonetheless, gold bulls could quickly exit speculative positions and send spot prices lower if global economic fundamentals start to improve from current expectations.
– Written by Rich Dvorak, Junior Analyst for DailyFX
– Follow @RichDvorakFX on Twitter