On Wednesday (August 19), spot gold prices surged more than 4% to a fresh high in over two and a half months. The rally was mainly driven by the US Treasury’s announcement to expand liquidity-support buyback operations for long-dated Treasuries, which triggered a sharp drop in US Treasury yields. FXStreet analyst Christian Borjon Valencia has published a fresh article analysing the technical outlook for gold prices.
Spot gold closed Wednesday with a 4.4% jump at $4,522.63 per ounce.
Valencia noted that despite hawkish language in the Federal Reserve meeting minutes, gold still posted a dramatic rally on Wednesday, as Treasury buybacks drove US yields substantially lower.
The US Treasury announced on Wednesday it would double the scale of liquidity-support buybacks for long-dated Treasuries, lifting market expectations for demand in long-duration bonds and sending yields rapidly lower. The 30-year US Treasury yield retreated sharply from near a 19-year high.
Valencia wrote that US Treasury yields fell substantially throughout Wednesday’s trading session, lifting gold prices, with the Treasury buyback programme acting as the catalyst. The 30-year US Treasury yield, which hit its highest level since 2007 on Tuesday, fell more than 8 bASIs points to 5.20%. Meanwhile, the benchmark 10-year US Treasury yield also dropped nearly 5 bASIs points to 4.660%.
(Source: Axios)
Bloomberg, citing people familiar with the matter, said: “The Trump administration needs a win, and that win may come in the form of artificially suppressing rising long-term Treasury yields.”
“Completely Unexpected by the Market”
Robert Gottlieb, former head of precious metals at Koch Supply and Trading, said the Treasury announcement took the market completely by surprise and was very bullish for gold, because falling long-dated Treasury yields and a potential further decline in the dollar both improve gold’s appeal.
Falling long-end yields are especially important for gold. Since gold pays no interest, the opportunity cost of holding bullion declines when yields available on fixed-income assets such as US Treasuries move lower.
Notably, US bond yields have climbed sharply since July amid sustained Middle East conflict pushing energy prices higher and lifting US inflation expectations. At the same time, the Federal Reserve has kept rates unchanged across its past five meetings as inflation growth moderated.
A weaker dollar also lifted demand for non-yielding gold. The US Dollar Index (DXY), which measures the greenback against a basket of six major currencies, fell 0.80% to 98.85 on Wednesday.
A weaker dollar makes dollar-denominated gold cheaper for investors holding other currencies, further boosting buying interest in bullion.
TD Securities said in a client note that the Treasury’s expanded liquidity-support buyback programme has “breathed new life” into the precious metals market.
TD Securities argued that even though inflows into gold investments have weakened recently, capital could return quickly amid Treasury liquidity support, a potential Fed willingness to look past energy price shocks, and growing stagflation rhetoric. These factors may ultimately push real yields lower, and lower real yields typically benefit non-interest-bearing assets such as gold.
Market focus will now shift further to the actual scale and pace of upcoming Treasury buybacks, and whether long-dated Treasury yields can maintain their downward trajectory.
Gold could target higher levels if yields keep falling and the dollar weakens further. Conversely, a renewed rise in inflation forcing the Fed into more hawkish policy could still pressure gold via higher interest rates.
Gold Technical Analysis
FXStreet analyst Christian Borjon Valencia said gold appears to be building upward momentum near the 200-day simple moving average (SMA) around $4,510 per ounce following news of Treasury buybacks. The Relative Strength Index (RSI) shows strengthening bullish momentum, pointing to further upside, with bulls now targeting higher levels.
Valencia said that with gold closing above $4,500 per ounce on Wednesday, bulls are positioned to challenge higher prices. After breaking the 200-day SMA, the next resistance zone sits at $4,700 per ounce, followed by the May 12 high of $4,735 per ounce, an area with a cluster of six candlesticks.
(Spot Gold Daily Chart, Source: FXStreet)
Valencia added that on the flip side, a false breakout above $4,500 per ounce could trigger a pullback below $4,400 per ounce and a test of the weekly low at $4,324 per ounce. A break below that level would target the prior week low of $4,311 per ounce, seen as the final line of defence, followed by a potential drop toward the 50-day SMA near $4,158 per ounce.