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After a stellar first quarter, gold's April trading started on a sour note as prices dropped $30 on the day amid rising yields. But analysts are keeping a close eye on the 2-year and the 10-year Treasury yields and what the inversion means for gold.
The main event Friday was not the highly-anticipated employment report but an inversion of the 2-year and the 10-year Treasury yield spread. Many market participants view this as a possible warning sign that recession could be around the corner.
"The inversion of the 10y-2y Treasury yield spread this week led to predictable speculation that the Fed's interest rate hikes would quickly push the U.S. economy into recession," said Capital Economics chief North America economist Paul Ashworth. "Given its impressive track record in predicting U.S. recessions – it's been almost 50 years since the last false positive – it would seem foolish to doubt that bearish recession speculation."
The inversion of the yield curve is a red flag, but it is not a timing tool, explained DailyFX strategist Michael Boutros. "It doesn't mean that we are heading into recession for sure. But it does highlight the threat that the environment is right for such a move. You will see that spread wobbling in the near term," Boutros said.
For gold, this should mean greater appeal from risk aversion. But so far, the sentiment hasn't translated into broader trading, said Gainesville Coins precious metals expert Everett Millman.
And this is why, despite these risk-off signs, gold's Friday price action was driven by the metal's reactions to rising bond yields and a stronger U.S. dollar. June Comex gold futures were last down $30 on the day and trading at $1,924.20 an ounce.
"There is too much volatility in the Treasury market right now," said Gainesville Coins precious metals expert Everett Millman. The Treasury market is selling off because of expectations of the Fed raising rates. So, bonds at lower yields are not as attractive, which is why we see the inversion," Millman said. "Markets are getting ahead of themselves with their lack of fear and expectations that the Fed can get inflation under control. We need to see how it plays out from the Fed first."
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This Russian bank sold 1 ton of gold in March
What's next after gold's Q1 rally?
The first quarter of 2022 was an impressive turnaround for gold, with prices rising more than 6% and posting their best gains since Q3 2020. More of this kind of price action is expected in the second quarter, with the $2,000 an ounce target looking within reach, said RJO Futures senior market strategist Frank Cholly.
"Gold has had a tendency to do a lot of consolidation before making a move up. We had a nice rally from February to mid-March. Now, gold is going through a bit of a correction. Markets are basing a bottom where we peaked out in mid-November. And $1,900-1,925 is showing to be good value. The market is bouncing along that range," Cholly said. "If we could get a close or a good pop above $1,950-75, we won't have trouble getting above $2,000. And in Q2, we can get above $2,000."
The broader picture for gold is still very constructive on the fundamental and technical levels, Boutros noted. But there could be more selloffs ahead for the precious metal, especially if the $1,828-49 level doesn't hold. "Gold's story will be balanced by the speed of Fed rate hikes. Any pullbacks in Q2 should be limited to the $1,828-49 range. Anything below that, and you are risking a much larger washout that will take serious dollar strength," he pointed out.
Next week's data
One major event next week will be Wednesday's release of the FOMC meeting minutes from March. "The minutes are expected to reveal details of the Fed's plans to shrink its balance sheet. Although we estimate that the trade deficit narrowed in nominal terms in February, in real terms, it appears to have widened markedly," Ashworth said.
In March, Powell signaled that the run-off could be similar to 2017-19 but would likely happen at a faster pace.
Friday's employment number was also good enough to reinforce the idea that the 50-basis point hike in May is not off the table. The CME FedWatch Tool is pricing in a 71% chance of that happening.
Other data releases to keep a close eye on include ISM non-manufacturing PMI on Tuesday and jobless claims on Thursday.
By Anna Golubova
For Kitco News
Time to buy Gold and Silver on the dips
