Gold Price Analysis: XAU/USD tests monthly highs under $1820, still on course for annual loss of about 4.0%

Spot gold prices are consolidating close to monthly highs just under the $1820 mark, have jumped from earlier weekly lows in the $1790 area after finding support at the 21-day moving average as US real yields slid. Despite a notable improvement in the market’s broader appetite for risk as Omicron-related fears about potential economic disruption and hawkish policy shifts at major central banks including the Fed, ECB and BoE, spot gold is on course to post a healthy monthly gain of about 2.5%, having rebounded more than 3.5% from earlier monthly lows under $1760.

Bond and FX market moves this month have been favourable to precious metals; the 10-year TIPS (real) yield is down roughly 12bps to back under -1.1%, while the DXY is flat on the month just under 96.00, having pulled back sharply from earlier monthly highs closer to 97.00. Recall that gold has an inverse relation to both real yields and the dollar as when the former rises, it raises the opportunity cost of holding non-yields gold and when the latter rises, it raises the cost of dollar-denominated gold for international investors.

On the final day of the year, XAU/USD looks on course to post a yearly loss of about 4.0%, its first annual loss in three. According to analysts at Reuters, the “global economic recovery made its (gold’s) safe-haven appeal less attractive… as central banks prepared to raise interest rates to contain inflation”. According to a Reuters poll released at the end of October which asked investors about their outlook for gold in 2022, the median forecast was for the precious metal to average $1750 throughout the year.

If XAU/USD closed out 2022 at this level, that would mark another roughly 4.0% annual decline. To summarise the thinking of many of the poll’s participants; “gold is unlikely to rise much while investors expect the U.S. Federal Reserve to reduce its asset purchases and raise rates” Reuters said, before quoting an analyst at Phillip Futures as saying that "both (QE taper and rate hikes)… are events that traditionally see gold prices put under pressure”.