Gold Price Analysis: XAU/USD subdued below $1800 as buoyant real yields keep bulls at bay

• Spot gold is struggling to make use of risk-averse market conditions on Monday and remains subdued under $1800.
• An on-the-day rise in real yields is the main reason why gold is struggling.

Despite a broadly risk-off market tone and an underperforming US dollar, spot gold (XAU/USD) prices are struggling to make headway on Monday. Prices are currently flat on the session but have slipped back from earlier session highs in the $1805 area to current levels around $1797 in recent trade. The 50-day moving average at $1795 provided support earlier in the session, but if this level goes, XAU/USD is likely to slip back to test early/mid-December highs and the 200DMA in the $1790 area.

Gold’s lackluster performance on Monday owes itself to the fact that real yields in the US have been advancing. 10-year TIPS yields, to which gold is very sensitive, are up about 2bps on the day and back to the north of the -1.0% level. But that still leaves the 10-year TIPS yield well within recent late-November/December ranges of about -1.1% to -0.9%. 5-year TIPS yields are current up about 4bps but are also within recent week’s ranges. Whether the most recent rally in real yields can build into a broader move higher is the key question – that of course would be bad for gold. Remember that as real yields rise, the opportunity cost of holding non-yielding gold also rises.

The recent hawkish shift on the Fed has some strategists betting on a move higher in real yields. Recall last week that the Fed doubled the pace of its QE taper, which Fed member Christopher Waller said indicated that the March meeting was live for a rate hike, and recall that the bank pointed to three rate hikes in 2022. Longer-term nominal yields have remained subdued in recent weeks despite this hawkish shift amid concerns for the longer-term outlook for growth. It only takes inflation expectations to fall at a greater rate than long-term growth expectations for this to cause real yields to rise (something a hawkish Fed could trigger). Gold traders should thus be on notice that market conditions could turn increasingly bearish for the precious metal in 2022.