Here’s Why the Gold Price has Fallen — Volatility Returns to Gold
The gold price jumped to an eight-week high last Tuesday, marking the start of 2021 with a steep rise in all currencies as the US dollar weakened to multiyear lows.
But what was a rapid start to the new year for the gold price has quickly turned into a bit of a shocker.
In the first six days of 2021, the gold price climbed almost 3.5% reaching about US$1,958 per ounce.
Coming off that high, the gold price has now lost 5.85% and it’s currently trading around $1,842 per ounce.
Why has volatility returned to the gold price?
Take a look at the chart below.
If you didn’t already know, the price of gold can be heavily influenced by the relative strength of the US dollar.
The chart indexes the strength of the US dollar against its major peers.
As we can see, the USD has been steep decline of the past five months or so — until very recently that is.
The sudden jump you see in the strength of the USD correlates with the fall in the price of gold.
Meaning investors are buying the US Dollar and moving out of their gold positions.
A strengthening USD has been known to correlate with market optimism, putting downwards pressure on the gold price.
However, with a general feel of uneasiness still persisting in many global markets a more precise explanation might be found in the recent spike in US Treasury yields.
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The relationship between gold and bonds is a complex one (so I won’t go into great detail here), however we have seen a negative correlation between gold and bond yields in recent times.
The US 10-Year yield pushed above the 1% level last week to float around its highest level since March 2020.
This coincided with a larger than expected loss of US jobs in December.
What’s ahead for gold and the US Dollar?
Consensus appears mixed for the outlook of gold this year.
Australia and New Zealand Banking GrpLtd [ASX:ANZ] said it expects the price of gold to hit new highs in 2021.
If we put technicals like bond yields aside for the moment and take a look at some of the other factors, what will that spell for gold?
Firstly, President-Elect Joe Biden has proposed ‘trillions’ in stimulus, which has led to forecasts of big growth in the US over the next two years.
Which could strengthen the USD further.
Secondly, the US will be one of the first countries to be vaccinated for COVID-19.
This will be factored into GDP forecasts, which underscores that most other countries will lag, including emerging markets, which will be a year behind.
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