Gold struggled to push higher on Tuesday despite the risk-off mood and weaker dollar.
The precious metal was pressured by rising treasury yields, which tend to dampen appetite for the zero-yielding metal. After tumbling as low as $1817.92, prices later rebounded back towards $1830 regions.
What are yields and why are they rising?
A bond yield is simply the amount of return a bond earns over a period of time. There is an inverse correlation between a bond’s yield and its price. Yields are rising because bond prices are falling.
So why are bonds falling?
The answer in one word is inflation.
US inflation fears have not only soured the market mood but dampened appetite for bonds. One thing to keep in mind is that as inflation rises, it affects the real return on bonds.
Is inflation good news for Gold?
Gold is often hailed as a hedge against inflation as it appreciates as the purchasing power of the dollar falls. This may limit downside losses and provide a platform for bulls to elevate prices to fresh multi-month highs.
However, concerns that rising inflation may force the Federal Reserve to raise interest rates sooner than later which could create obstacles for gold. Earlier, we highlighted how the precious metal is zero-yielding.
Given the metal's zero-yielding nature, it tends to struggle in a high-interest rate environment.
All eyes on the US CPI
On Wednesday, the U.S. will release the Consumer Price Index report for April. Headline inflation is expected to show a sharp increase year-on-year to 3.6% from 2.6% in the previous month. Core inflation is forecast to hit 2.3% year-on-year from 1.6% back in March.
Technicals: Gold bulls still in control
Bulls remain in control as long as $1800 proves to be reliable support.
A technical pullback could be in the works before gold resumes the current uptrend. If a solid daily close above $1840 is achieved, this could signal a move higher towards $1855 and $1870. Should $1800 prove to be unreliable support, a decline back towards $1770 may be on the cards.
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