Gold Price Analysis: XAU/USD slumps back to $1800 level amid US yield surge as Omicron worries priced out

• Spot gold prices have fallen back sharply on Monday from around $1830 to the $1800 area as yields rise sharply.
• Upside has been most pronounced in the long-end for both real and nominal yields, as Omicron-worries are priced out.

A sharp rise in long-term US real and nominal bond yields has triggered heavy selling pressure in spot gold (XAU/USD), with prices slumping back from Asia Pacific levels around $1830 to current levels over 1.5% lower at $1800. For now, spot prices Whilst the short-end of the US yield curve is enjoying solid gains with 2s up about 4bps to post-pandemic highs near 0.80% as traders bet more confidently on near-term Fed hawkishness, the real action is occurring at the long-end. 5s are up over 10bps to 1.36%, 7s are up 12bps to 1.55%, 10s are up 13bps to 1.63%, as are 30s which have moved above 2.0% for the first time since November.

More important for gold given its negative correlation to real yields, 10-year TIPS are up nearly 10bps and probing the -1.0% level again. Recall that when real yields rise, the opportunity cost of holding non-yielding gold also rises, dimming its appeal. The surge in yields appears to have its roots in a surge in confidence about the long-term outlook for the US economic recovery, despite the ongoing risks presented by Omicron.

Market participants have ignored negative headlines about schools in the US delaying post-Christmas holiday restarts and are focusing on the fact that the number of deaths and hospitalisations, despite record infection rates in the US, Europe and UK, remain low. As a result, governments seem more reluctant than in the past to reimpose lockdowns. All of this optimism is not only hurting gold’s appeal from the yield standpoint, but also as a safe-haven asset.

The move higher in US bond yields essentially marks a return to pre-Omicron emergence levels. Whilst short-end rates are at post-pandemic highs on Fed rate hike expectations, 10s and 30s still have some way to go (the former hit 1.77% last March and the latter surpassed 2.50%). Markets are in a very optimistic mood on Monday as the new year gets underway, with US equities near-record highs as the likes of Tesla and Apple surge (the latter the first company to hit the $3T market capitalisation mark). Should yields continue to rise as Omicron worries subside, gold could be in trouble.

Bank views

Given the new year is just getting underway, it's worth taking some time to assess the outlook of some banks for gold. BNP Paribas “remain bearish on gold prices in 2022, given the rising U.S. rates environment”. “While the price could rise further in the near term”, the bank adds, “we forecast it to fall to $1,800 per ounce by the end of the first quarter, $1,650 by the end of 2022 and $1,600 by the end of 2023”. Citi is also bearish, seeing the precious metal “averaging about $1,685 throughout 2022, driven by a combination of dollar strength and higher U.S. real yields”.

Goldman Sachs warns that “gold may fare better if inflation concerns build further and central banks are perceived to be accommodating more of that shock, particularly since positions appear to have been materially reduced”. TD Securities agree, saying they “think gold continues to do well, mainly because we expect inflation to be quite elevated and we continue to expect significant monetary accommodation for the foreseeable future, which will result in highly negative real rates across much of the yield curve”.