Gold Price Dented by US Dollar Rally with Higher Yields as Debt Ceiling Woes Recede

The gold price slid to a 2-month low to start the week as concerns around the US debt ceiling appear to be subsiding at the same time that US yields are ticking higher.

Treasury yields have been steadily climbing throughout the last few weeks across the curve, but the most notable changes have been seen at the short end of the curve.

The benchmark 2-year bond made a run above 4.60% on Friday after having dipped to 3.66% earlier this month.

The 1-year note also made a 23-year high on Friday when it nudged 5.30%. It touched 4.03% in early March and the higher rate of return reflects the markets’ perception that the Federal Reserve is less likely to be cutting rates this year. Interest rate swaps and futures markets have kicked that concept into 2024.

The higher return from US Dollar denominated debt seems to have broadly supported the ‘big dollar’.

It is making multi-month peaks against many currencies and the commodity complex is generally lower but silver managed to notch up a decent rally on Friday. Although it still finished down for last week and it is steady to start this week near US$ 23.30 an ounce.

Undermining the yellow metal is the rise in US real yields. The real yield is the nominal yield less the market-priced inflation rate derived from Treasury inflation-protected securities (TIPS) for the same tenor.

The widely watched US 10-year real yield is approaching 1.60%, a level not seen since the regional banking crisis unfolded back in March. When the inflation-adjusted return is rising, investors are left to ponder the outlook for non-interest-bearing commodities such as gold.

The US Dollar has been on a steady run higher of late and the direction in the DXY (USD) Index might lead the precious metal on its next move. At the same time, gold volatility has been slipping and this may indicate that the market is at ease with the current pricing.