Gold Price Analysis: XAU/USD probing $1820, looking resilient ahead of US ADP data and Fed minutes

• Spot gold prices continue to advance and have in recent trade been testing $1820, aided by a weaker US dollar.
• Focus now turn to US ADP jobs data and the release of the minutes from the hawkish December FOMC meeting.

Dollar weakness on Wednesday, primarily versus the likes of the euro and yen, that has seen the DXY drop back to probe the 96.00 level has put spot gold (XAU/USD) prices on course for a second successive day of gains. A weaker dollar makes USD-denominated gold cheaper for international buyers, increasing its demand. Prices have in recent trade been testing the $1820 level, though are for now unable to break it, but remain on course to post a daily gain of about 0.2% or slightly more than $3.0 on the day. Attention now turns to the release of ADP’s estimate of US national employment change in December, which will help traders calibrate expectations for Friday’s official non-farm payrolls number, and could thus cause some choppiness.

The data is released at 1315GMT, a few hours before the release of the minutes of the hawkish December Fed meeting where the bank doubled its QE tapering pace and signaled that three rate hikes in 2022 was likely. The minutes should match the hawkish tone of the meeting, with Fed members expected to sound bullish on 2022 growth, concerned about inflation and surprised about the extent of the labour shortage which arguably means the US is already very close to full employment. Any chatter about potential Quantitative Tightening (i.e. the Fed reducing its bond holdings) later in the year could underpin the dollar and yields and present headwinds for gold.

But gold has been remarkably resilient to this week’s sharp rise in long-term bond yields, which has been primarily driven by rising real yields. Typically, this is a negative for gold given that an increase in opportunity cost (for which real yields are a proxy) typically undermines demand for non-yielding assets. But long-term real yields remain in deeply negative territory, indicative of the fact that investors still do not expect long-term US interest rates to come anywhere near inflation. As a result, demand for alternative safe-haven assets that offer better inflation protection, such as gold, remains strong. It will be interesting to see whether real yields can continue their recent pick up from December lows and the extent to which this weighs on gold.