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XAU/USD volte-face does not go unnoticed


11 October 2022

Gold price gained 6.0% in the week ending 4 October as macro drivers excite large short covering, strategists at Société Générale report. Gold experienced strong short covering of $4.7bn, the third largest figure since the data started being collected in 2006. This reversed a seven-week trend, initiated on 10 August, that saw gold’s total bearish flow reach $14.4bn.

Third largest money manager weekly short covering since 2006

The DXY index fell 3.5%, while the US 10y real yield lost 22 bps, albeit the decrease in the latter was not linear. This made the precious metal cheaper to foreign investors and more appealing than income-generating assets such as Treasuries, hence increasing demand and prices.

Gold remains under some selling pressure for the fifth successive day on Tuesday and drops to over a one-week low, around the $1,660 area during the first half of the European session. A fresh leg up in the US Treasury bond yields, along with a stronger US dollar, turns out to be key factors driving flows away from the non-yielding yellow metal.

In fact, the yield on the benchmark 10-year US government bond inches back closer to the 4% threshold amid expectations that the Fed will tighten its monetary policy at a faster pace to tame inflation. The bets were lifted by the overnight hawkish remarks from Fed Vice Chair Lael Brainard, reiterating the US central bank's commitment to bring inflation down.

Elevated US Treasury bond yields push the USD higher for the fifth straight day, which, in turn, is seen exerting additional downward pressure on the dollar-denominated gold. Even, the prevalent risk-off mood - amid growing recession fears, geopolitical risks and fresh US-China trade jitters - does little to lend any support to the safe-haven precious metal.

The market sentiment remains fragile amid worries about economic headwinds stemming from rapidly rising borrowing costs. There isn't any relevant market-moving economic data due for release from the US. Hence, traders on Tuesday will take cues from speeches by influential FOMC members. This, along with the US bond yields, should influence the USD price dynamics. Apart from this, the broader market risk sentiment might contribute to producing short-term opportunities around gold.

The focus, however, will remain on the FOMC meeting minutes, due on Wednesday, and will be followed by the latest US consumer inflation figures on Thursday. The US CPI is expected to remain stubbornly high and reinforce the Fed's hawkish rhetoric. This, in turn, suggests that the path of least resistance for gold is to the downside.

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