Gold Price Analysis: XAU/USD subdued in $1780 area as real yields flatline ahead of key US inflation data

• Spot gold continues to trade subdued in the $1780 area as real yields remain flat on the week.
• Markets are in wait-and-see mode ahead of Friday’s US Consumer Price Inflation report.

Spot gold (XAU/USD) prices have been subdued thus far this Tuesday and have continued to trade within this week’s $1775-$1785ish ranges. The broader market mood is one of risk on for a second consecutive day, with risk assets (stocks, oil) broadly building on Monday’s gains and this, for the most part, weighing on safe-haven assets (yen, bonds). Omicron-related fears have eased in recent days as more evidence has emerged from South Africa alluding to the variant’s comparative mildness versus previous Covid-19 variants. Traders are also citing easing from the PBoC this week and indications from Chinese authorities that they will step in to assure healthy growth in 2022 as positive for risk appetite.

For now, gold has been largely immune to the broad recovery in risk appetite this week, despite it typically being seen as a safe haven asset that should depreciate in value in such an environment. That’s probably because US real yields, with which spot gold has a close correlation, have remained subdued this week, despite a sharp rise in nominal yields. For reference, the 10-year TIPS yield is little moved on the week just under -1.0%, while the 5-year TIPS yield is also broadly flat and trading in the -1.50s% area.

Gold has a negative correlation to US real yields, which market participants use as a proxy for opportunity cost. As real yields rise, the opportunity cost of holding non-yielding gold rises with it, undermining demand for the precious metal. Real yields, gold and FX markets will be eyeing this week’s US Consumer Price Inflation (CPI) data for indications as to any potential policy changes the Fed might announce next Wednesday after the FOMC meeting.

At present, recent hawkish rhetoric from Fed Chair Jerome Powell and others on the FOMC has markets expecting that the bank will announce an acceleration of its QE taper this month. A further rise in CPI should confirm this. But, despite high inflation, bond markets remain unconvinced that the Fed’s plans on tightening monetary policy will be sufficient to get real yields back into positive territory. Should that start to change and real yields charge higher, gold could be headed back to a test of recent lows in the $1760 region.