Gold Price Analysis: XAU/USD hits six-week highs despite risk-on/holiday trading conditions

• Spot gold prices moved to six-week highs despite risk-on markets as long-term US bond yields remain subdued.
• XAU/USD hit $1818, surpassing the December and late-November highs, up $30 from last week’s lows.

Spot gold (XAU/USD) prices hit six-week highs on Tuesday, surpassing December’s $1814.30 high and the 26 November high at $1815.57 to hit $1818. The safe-haven precious metal is rallying despite risk-on conditions in other asset classes such as stocks (US equities are trading at record highs in pre-market trade) and risk-sensitive commodities such as oil. Despite typical low volumes at this time of year owing to the Christmas/year-end holidays, traders have been aggressively pricing out bearish economic scenarios, with the fast-spreading Omicron Covid-19 variant looking mild, reducing lockdown risk in the US and elsewhere. This hasn’t weighed at all on gold, with the precious metal having now advanced about $30 or 1.7% from last week’s lows in the mid-$1780s.

XAU/USD has been taking its cue, as is normally the case, from FX and bond markets. In terms of the former, the dollar continues to trade close to the bottom of recent ranges, with the DXY subdued just to the north of the 96.00 level. Meanwhile, though short-end US yields have been picking up as traders price in the probability of an increasingly hawkish Fed (markets currently assign a roughly 50% chance of a rate hike in March), longer-term US yields remain subdued. The nominal US 10-year, for example, continues to trade under 1.50%, having been unable to move higher in tandem with stocks/oil as some might have anticipated. 10-year TIPS (real) yields, meanwhile, also remain subdued and within recent ranges underneath the -1.0% level.

Longer-term bond yields continue to tell a story of a subdued long-term outlook for the US economy, with growth and inflation reverting back to sub-trend levels over the coming years and monetary policy remaining reasonably stimulative in the long run. This could reflect a few things; 1) that markets are disappointed that Congress hasn’t yet passed the Biden administration’s Build Back Better spending package, 2) that traders are worried the Fed is going to tigthen too soon a stymie growth and 3) that the pandemic is set to weigh on economic activity for the foreseeable future. As long as longer-term US yields (real and nominal) remain subdued, this will support gold above the $1800s. The big threat to gold would be if this bearish long-term outlook for the US starts to improve.

In the immediate future, there is very little by way of US data this week that can shift the macro narrative. Next week will be much bigger on that front with the release of the December official jobs report and ISM surveys.