Gold Price Analysis: XAU/USD slips back under $1780, remains a sell on rallies amid unfavourable yield environment

• Spot gold has slipped back from earlier session highs near $1790 and is now under $1780 again.
• The yield environment is unfavourable for precious metals at the start of the week.
• Focus will be on US inflation data on Friday.  

Spot gold (XAU/USD) prices have been waning from Asia Pacific session highs throughout the European Monday morning ahead of the US open, with spot prices now back below $1780, having at one point been as high as $1787. The precious metal has been largely unable to benefit from its safe-haven status in recent weeks despite Omicron-inspired risk-off flows that have brought global equity markets down from record peaks reached as recently as mid-November.

One of the main reasons for this has been the fact that 1) US macro data has remained strong and 2) the Fed has pivoted hawkishly and is now expected to accelerate its QE taper from January. The hawkish turn has seen short-end and real US yields higher, increasing the opportunity cost of holding non-yields gold.

On Monday, nominal US yields are higher across the curve, though rather than having anything to do with US data or the Fed, this is more a reflection of a more risk-on market tone. The news out of South Africa regarding the severity of illness associated with Omicron Covid-19 variant infection continues to look good (it looks very mild compared to other variants) and the PBoC surprised market participants with a 50bps RRR cut. This will release CNY 1.2T in liquidity from the Chinese banking system and should shore up slowing global growth.

Higher yields mean that, for now, market participants are viewing rallies towards the 200 and 50-day moving averages just above $1790 as a selling opportunity in spot gold. If more positive Omicron newsflow continued to support risk appetite, longer-term yields (which have been under significant pressure recently) could start recovering back towards recent peaks and global equities may start to grind back towards recent record levels.

This would likely be a toxic combination for safe-haven gold, which could head lower again to test recent lows around $1760. In the immediate future, another key focus for gold traders will be Friday’s US CPI report. If it surprises to the upside once again (the headline YoY rate is seen rising to 6.8% from 6.2% in November), this would solidify expectations for a hawkish Fed shift at the 15 December meeting.