XAU/EUR pullback continues, now under 21DMA at €1586 as Eurozone real yields rise

Euro-denominated spot gold (XAU/EUR) prices tumbled beneath their 21-day moving average at €1586 on Tuesday, taking losses on the week to over €50. Spot prices also fell below a key area of support in the form of the 5 January 2021 high at €1591. The next key area of support that the bears are likely to target is the late May/early June highs in the €1560s.

Euro-denominated spot gold’s decline this week was initially triggered after the announcement in the US that Jerome Powell would be renominated as Fed chair, prompting a rise in developed market real yields. The hawkish reaction to the news reflected an unwinding of bets that comparatively dovish Lael Brainard would be nominated as Fed chair.

Either way, the news pushed Eurozone real yields higher, but the move extended on Tuesday following more hawkish than expected commentary from influential ECB member Isabel Schnabel. She warned that inflation in the Eurozone would be higher than previously thought in 2022 and could stay above the ECB's target in the medium term. This supports the case for ending the PEPP in March despite the current Covid-19 wave, she added. According to ING, Schnabel’s comments “hint at how the ECB will try to cautiously join the exit lane” regarding ultra-accommodative monetary policy. Thus, the bank expects “the ECB to end PEPP in March 2022, introduce a new third transition purchase programme and to gradually move over to APP as the only asset purchase programme”.

German 5-year inflation-linked (real) yields rose from -2.40% to -2.30% on Monday and have continued higher to around -2.25% on Tuesday. Meanwhile, German 10-year inflation-linked yields, which rose above 7bps on Monday to above -2.0%, shot a further 10bps higher on Tuesday to above -1.90%. Higher real yields weigh on gold prices as it means the opportunity cost of holding non-yielding gold has gone up.

If the recent rally in Eurozone real yields does mark the start of a more prolonged move higher as the ECB slowly starts to wind down stimulus in 2022, this would weigh on XAU/EUR in the medium-term. Spot prices would likely fall back into the €1400-1550 range that persisted for most of 2021.