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Gold recovers from 9-month low as U.S. yields retreat

· Gold prices rose on Tuesday, as a pullback in U.S. Treasury yields added some luster to the metal after it hit a nine-month low in the previous session.

· Spot gold rose 0.7% to $1,692.21 per ounce by 0703 GMT. Prices had fallen more than 1% on Monday to $1,676.10, their lowest since June 5.

· U.S. gold futures climbed 0.7% to $1,690.30.

· “Dip buyers have emerged after the 1.15% fall overnight and U.S. bond yields have slightly eased, which has provided support for precious metals,” OANDA senior market analyst Jeffrey Halley said.

· U.S. 10-year Treasury yields edged lower, raising the appeal of holding gold. A steady rise in bond yields makes holding gold less attractive as investors typically tend to gravitate toward assets that generate steady income in the form of interest or dividend.

· “In an environment of rising U.S. yields, growth recovery, vaccine rollouts, and investors getting more optimistic on growth prospects; demand for safe havens will struggle,” said Lachlan Shaw, National Australia Bank’s head of commodity research.

· While the U.S. Federal Reserve has downplayed the rise in yields so far, the European Central Bank will discuss on Thursday the merits of intervening.

· “Central banks will need to try and strike a balance between yields reflating in a reasonable fashion at a reasonable speed, compared to the recovery in economic activity, and so there may be tweaks along the way,” Shaw said.

· Holdings of the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, fell to their lowest since April 2020 on Monday.

· “Gold’s short-term technicals have dipped into oversold territory, which should provide some temporary support over the session, however gains are likely to be limited to the $1,700 region,” OANDA’s Halley said.

· Gold: Hunt Continues for Bottom in $1,600 Territory

Will it end here or go even lower?

There’s no clear answer as gold continues to seek a bottom in $1,600 an ounce territory.

However, as the path of least resistance seems lower, gold bears will likely have more successes in the near-term than bulls — despite potential inflationary pressures from President Biden’s oncoming $1.9 trillion pandemic relief bill that should be friendly to supporters of the yellow metal.

“To say that gold's price action is unimpressive is an understatement," said Jeffrey Halley, senior markets strategist at online brokerage OANDA. "Gold is climbing the stairs on one leg while descending by jumping out of the 10th-floor window.”

With bond yields benchmarked by the U.S. 10-year Treasury note and the the dollar — gold’s archrival — spiking again Monday, the shiny metal could remain on “life support”, Halley said “If dollar strength continues, a fall to $1600.00 an ounce is entirely possible later in the week. Gold needs to recapture the $1760 region to suggest that the worst is over.”

In the event of a rebound from oversold RSI, or Relative Strength Index, conditions, gold could spend the subsequent few sessions consolidating in a $1690-$1720 range, he added.

At under $1,680 an ounce, gold prices are down nearly 12% on the year. From their August record high of nearly $2,090, Comex futures are down about 20%, technically placing gold in a bear market.

Gold has been on a slow-burn meltdown over the past month, getting swept up in a stock market rout triggered by surging bond yields and the dollar, despite its so-called standing as an inflation hedge.

The yellow metal’s departure from the path of inflation has been inexplicable to many of its faithful as Biden’s $1.9 trillion pandemic relief bill should land the United States with larger budget deficits and higher debt-to-GDP ratios going forth. These should logically weigh on the dollar and send investors toward gold. But the opposite is happening instead.

"Gold has been undercut by cheerful economic optimism over a robust economic recovery and faster than anticipated rises in bond yields," Axi’s chief global market strategist Stephen Innes said. “The market may have fallen too steeply, too quickly.”

· Even at $1,600, there is plenty of value in gold producers and the metal - Sprott's Grosskopf

There is still plenty of long-term value in the gold market, with equities looking extremely attractive even as the precious metal trades below $1,700 an ounce, according to one fund manager.

"In the long run, monetary debasement is actually required to balance the system," he said. "Governments around the world come up with new excuses to print more money. At the end of the day, that is the most important variable that will carry gold holders for the next five to 10 years."

Although the Federal Reserve has downplayed inflation, Grosskopf said that the threat is real and only continues to grow. He added that the rally in commodities like copper, lumber, and oil would eventually lead to inflation, which the central bank wants because it is the only way to deal with the growing debt burden.

"If you look at what is going on in the global economy, how does anyone say inflation is only going to be 2%," he said.

With rising bond yields dominating the gold market, Grosskopf said investors are moving to other markets with better momentum in oil, real estate, and cryptocurrencies.

Because the Federal Reserve is mostly brushing aside the bond market selloff, Grosskopf said gold prices would continue to struggle. As to how high yields can go before the Federal Reserve steps in, Grosskopf said it is impossible to know.

· Silver rose 0.8% to $25.30 an ounce. Palladium climbed 0.3% to $2,322.68. Platinum gained 0.8% to $1,144.49.

Reference: FXStreet, Investing, Kitco