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James Hyerczyk

Gold futures plunged last week as prospects for a smooth transition of power in Washington and a jump in U.S. Treasury yields hammered the precious metal investment. When the dust finally settled on Friday, gold registered its worst weekly performance since November.

Some analysts claim that a major fundamental shift for many investors is taking place as they transition from treating gold as a safe-haven asset. I don’t agree since gold hasn’t exhibited that characteristic in almost nine months.

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In my opinion, traders have been dumping gold because Fed policy is pushing 10-year Treasury notes and 30-year Treasury bond yields higher. Investors are realizing they are wasting their money holding on to non-interesting bearing gold, trimming their excessive long positions and putting that money to work earning a yield.

They are not dumping everything, however, since Fed policy and the chance of additional government fiscal stimulus does provide a good support base for the precious metal.

That being said, gold is likely to remain rangebound for much of the year with investors coming in strong on the dips into long-term value zones and selling out pieces of those positions on rallies.

Last week, February Comex gold settled at $1835.40, down $59.70 or -3.15%.

Lifting of Political Uncertainty Pressuring Prices

Democrat control of the U.S. Senate has raised bets for large stimulus, lifting the benchmark 10-year bond yield to its highest level since March. Higher yields helped shake some of the weaker U.S. Dollar shorts out the market, dampening foreign demand for the dollar-denominated asset.

Additionally, since U.S. President Donald Trump agreed to an orderly transition of power, bullish speculators have decided to book profits and lighten up on the long side.

Here’s another way to explain last week’s sell-off. While gold has generally been seen as a hedge against inflation that could result from widespread stimulus, especially last year, that has changed as higher bond yields increase the opportunity cost of holding non-interest yielding bullion.


Benchmark 10-year Treasury Yield Climbs Above 1.10%

The 10-year Treasury yield climbed throughout the week even on Friday after a U.S. jobs report for December showed an unexpected loss.

The yield on the benchmark 10-year Treasury note jumped to 1.124% last week, its highest level since March 30. The yield on the 30-year Treasury bond also rose to 1.893%, a level not seen since March.

The rise in bond yields was also supported by comments from Federal Reserve Vice Chairman Richard Clarida who said he expects the central bank to maintain the pace of its asset purchases through the balance of 2021.

Weekly Forecast

Gold prices are likely to remain under pressure as long as Treasury yields continue to rise and especially if their strength translates into a weaker U.S. Dollar. The U.S. Dollar Index futures contract is loaded with short-sellers, which could pose a problem for gold bulls if investors decide to buy back those excessive short dollar positions.

Late last week, Forex dealers said speculators pared some short positions in the U.S. Dollar on speculation the Fed would not now increase its bond buying program, given the rollout of coronavirus vaccines had improved the economic outlook for later in the year.

That combined with talk of more fiscal stimulus as Democrats took control of the Senate to push longer-term Treasury yields higher and gave the U.S. Dollar a lift after weeks of losses.

Gold traders could be in a world of hurt this week if short U.S. Dollar investors decide to follow the herd theory and cover those positions at the same time.

For a look at all of today’s economic events, check out our economic calendar.

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