For a non-interest bearing asset priced in US dollars, gold is under pressure.
As seen in the chart below, gold futures tumbled below the $US1,300 an ounce level on Tuesday, leaving it at the lowest level this year.
“Gold futures dipped below $US1,300 for the first time since December as the US dollar strengthened. The prospect of rising US interest rates has also weighed on the precious metal,” said Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.
“Historically, gold prices and US-10 year real yields (the yield less inflation) have held a strong inverse correlation. That relationship is consistent with US interest bearing securities looking more attractive than gold when yields are rising.”
Earlier this year, the relationship between real US yields and the gold price weakened somewhat as the US dollar fell, helping to keep the gold price above $1,300 an ounce.
However, with real yields and the US dollar now moving in the same direction — higher — Dhar says this could weigh on the gold price further.
“If the US dollar continues to strengthen we could see gold prices track between $US1,250-1,300.”