Gold prices end higher as U.S. Treasury yields decline

Deal or no deal on the U.S. debt ceiling, a U.S. debt rating downgrade is a huge possibility, he told MarketWatch, and “we could rerun the paradoxical ‘buy the debt of the defaulter dynamic’.”

In that case, there may be a rally in Treasurys, as “I would expect the market to price in a more dovish Fed on a ratings agency downgrade,” said Innes. “This is gold positive.”

Gold prices have retreated for most of May as the dollar has strengthened and Treasury yields have risen month to date, partly driven by the lack of progress on a U.S. debt ceiling deal in Congress, though an agreement announced Saturday night allowed bill yields to ease Tuesday.

“It looks increasingly likely that Congress will pass a debt deal to prevent a default,” said Fawad Razaqzada, market analyst at StoneX.

Over the weekend, President Joe Biden and House Speaker Kevin McCarthy reached a deal to raise the U.S. federal government’s debt limit. The agreement must now pass both chambers of Congress, where it is expected that centrists from both parties will band together to pass it.

“Investors’ required rate of return has thus fallen by holding U.S. government debt, as the risk of default has fallen in their eyes. This is reflected in falling bond yields,” Razaqzada said in a market report. “As yields dip, up goes the appeal of zero-yielding assets on a relative basis.” 

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.688%
was off by 10.7 basis points at 3.697% in Tuesday dealings.

However, expectations for another interest rate rise from the Federal Reserve in June have risen after Friday’s U.S. inflation data.

The U.S. dollar
DXY,
-0.13%
has risen over the past month, but a closely watched gauge of the greenback’s value against major currencies was trading slightly lower on Tuesday. The ICE U.S. Dollar Index was off slightly at 104.18. Weakness in the greenback can provide support for dollar-denominated prices of gold.

Overall, “a resurgent dollar and relief that a U.S. debt ceiling deal has finally been reached have left their marks on gold, which sliced below the $1,935/oz region earlier today to hit its lowest levels in six weeks,” said Marios Hadjikyriacos, senior investment analyst at XM, in emailed commentary.

“It is a troublesome environment for bullion, as the steepening of the Fed’s implied rate trajectory has simultaneously turbocharged the dollar and propelled Treasury yields higher, both of which make the nonyielding metal that is denominated in U.S. dollars less attractive,” he added.

Gold futures remain lower month to date though prices did reach their second-highest settlement on record in early May.

Read: Why gold still has a shot to reach a record high this year

In order for gold to reach a new record high, that would “likely require signs of weakness in personal consumption and employment,” said Caesar Bryan, portfolio manager of the Gabelli Gold Fund.

“In the face of obvious weakness in the real economy, there would be tremendous pressure on the Fed to become more accommodative,” he said. “The Fed would be under pressure to be less concerned about inflation.”

However, continued “reports of a strong labor market in the U.S. would result in a ‘tighter for longer Fed’, which would likely pressure the gold price in the short term,” said Bryan. The monthly U.S. employment report will be released Friday.