Gold struggling despite softer US dollar ahead of key long-bond auction

• Gold is struggling to break resistance above $1985
• A US 20-year Treasury auction later Monday will likely play an outsized role in determining near-term movements in US Treasury yields and USD

Gold faces an interesting start to the week with the US dollar falling to fresh two-month lows ahead of a key US Treasury auction, the latter providing an obvious catalyst that could dictate whether we see a retest of resistance above $2000.

US dollar hammered in Asia

In what is an unusual move for Asia when there’s been no major macroeconomic news out over the weekend, there has been a sustained, across-the-board weakening of the US dollar in Asian trade on Monday, coinciding with USD/CNH and USD/JPY breaking though various support levels during North American trade on Friday. Those moves have continued today, benefitting the likes of the AUD and NZD more than others.

Long bond auction today’s big market event

Gold, too, has caught a minor bid, although the moves so far have been modest in comparison. Whether the moves in FX and precious metals will extend further are likely to be influenced by the outcome of a 20-year bond auction from the US Treasury that will be conducted later in the session.

The last longer-dated auction was a disaster for long-bond bulls with a 30-year offering recording the longest tail on record with nearly quarter of the entire line forced upon primary dealers. As an indicator of demand, it was not great, adding to fears over the US government’s ability to fund itself over the longer-term given the present fiscal trajectory.

With yields now lower than that event, there’s clearly a risk that demand will be tepid again, working against longer-duration assets such as gold by forcing yields higher. The one key difference on this occasion is that markets are watching this event like a hawk, ensuring there may be an even bigger reaction depending on what the result delivers.

Gold unable to advance despite weaker USD

For gold, despite three failures at $1985 over the past three sessions, momentum looks to be swinging towards the topside with RSI breaking its downtrend while MACD is on the cusp of crossing from below. Under a scenario where the auction paints a picture of solid demand, it may provide the greenlight buyers require to venture above $2000, a level where it has struggled in an environment of higher yields and stronger USD previously.

If the auction is weak, warning of waning demand for longer-dated US dollar debt, it’s likely to remain a headwind for the gold price near-term as real and nominal yields push higher, paving the way for a possible retracement towards a support zone running from $1945 through to the 200-day moving average which is found at $1937.80.

-- Written by David Scutt

Follow David on Twitter @scutty