Gold breaks $1300 as yields surge…but don’t write off metal yet

After a rather quiet start, things got livelier around midday in London as benchmark government yields started to climb higher – slowly at first before picking up momentum as U.S. traders joined the fun. The dollar caught a bid while U.S. index futures dropped amid concerns over rising interest rates. There wasn’t an awful lot of data to cause the wild moves, with UK wages coming in line with the expectations while the upward revisions in U.S. retail sales numbers for March helped to offset the slightly weaker April figures. As a result, the dollar remained bid and in the greenback’s slipstream, the GBP/USD dropped below 1.35, the euro/U.S. dollar (EUR/USD) currency pair came to within 20 pips of 1.18 handle and most notably, gold took out $1300 per ounce support. At the time of this writing, though, the dollar was easing back a little, but stocks remained under pressure as yields stayed elevated.

Yields surge weighs on noninterest-bearing assets, stocks

The pressure on gold was actually building up even before the U.S. data hit the wires. Despite the weakness in the stock markets, the perceived safe-haven metal finally took out the liquidity that was resting below $1300 in a sharp move as the bulls lost control of the 200-day average support at $1306. Sentiment turned negative towards gold ever since government yields started to push higher. As the benchmark 10-year U.S. debt yield climbed above 3.06% today, it made little sense for speculators to buy something that pays no interest.

Could gold make a comeback?

But if yields ease back now then the precious metal could recover some lost ground over the coming days. Otherwise, the only hope for dollar-denominated gold is a potential correction in the greenback now. We think that the pound and euro may be slightly under valued at these levels. If we are correct and the EUR/USD and GBP/USD do turn around soon then there is a possibility for gold to also find some buyers. Also, gold being an inflation hedge, could find support in its physical form in the event price levels rise further.

However, the technical bias is now clearly bearish given the breakdown of key support at $1300. If this breakdown is sustained, we could see gold drop to the 61.8% Fibonacci retracement at $1286 next, before it has any chance of a comeback. However, it would be bullish if the now broken $1300 level is reclaimed decisively. Specifically, if the price of the yellow metal goes back above the $1302-$1308 resistance range then today’s sell-off could be considered a false break to trap the sellers. The longer-term outlook will turn bullish if gold were to go on and break the most recent swing high at $1325. But for now, the path of least resistance remains to the downside.