Gold vulnerable as upside risks for US yields build

• The corrective move in US yields appears like it may run its course, according to recent price action
• Potential debt downgrades, soft longer-dated US Treasury auctions suggests risks for yields may be higher in the near-term
• Higher real and nominal bond yields would normally be negative for gold prices.

Have US benchmark bond yields bottomed?

US benchmark bond yields look like they may have bottomed in the near-term, an outcome that may generate additional headwinds for gold at time when it’s already struggling.

As can be seen on the daily candlestick chart below, after a precipitous drop in late September, US 10-year note yields have fallen below 4.5% on three separate occasions in November but have never managed to stay there, snapping higher on each occasion.

While technical analysis on yields is not widely accepted, it’s hard not to notice the bullish engulfing candle that occurred last Thursday, corresponding with what was widely regarded as being one of the weakest 30-year Treasury auctions on record. The 10-year note auction earlier in the week wasn’t much better. Moody’s decided to rub salt into the wounds on Friday, putting the US sovereign credit on watch for a potential downgrade.

When you combine the price action and fundamentals together, it suggests yields may need to increase further to satisfactorily compensate buyers for the additional risk they are taking on during this delicate moment for the US fiscal trajectory.

Gold vulnerable to higher yields

For a non-yielding asset such as gold, the prospect of higher yields may amplify near-term downside risks at time when it’s already struggling on the shorter timeframe charts. Having failed to hold above $2000 in the early stages of the conflict between Israel and Hamas, gold has been grinding lower over recent weeks, leaving it sandwiched between downtrend resistance and horizontal support.

In the advent that US yields do push meaningfully higher, it will likely drag real, inflation-adjusted benchmark US yields higher with it, creating the kind of conditions that could easily see gold break to the downside, opening the door for a potential push back towards support located just above $1900. If the downside break does occur, it would allow for a tight stop to be placed above $1933 for protection against a false break/reversal.

-- Written by David Scutt

Follow David on Twitter @scutty