Comex gold steadies as US Treasuries settle down

Gold on the Comex division of the New York Mercantile Exchange returned to positive territory on Thursday after two days of losses as US Treasury bond yields eased and bargain-hunters entered the market.

Gold futures for February delivery were recently trading up $2.40 at $1,385.60 per ounce. Trade has ranged from $1,381 to $1,395 today.

The yellow metal had dropped slightly more than two percent after reaching a lifetime high of $1,432.50 per ounce on Tuesday.

The main catalyst behind gold’s earlier decline had been the surge in 10-year Treasuries, which on Wednesday hit a six-month high of 3.253 percent but have since edged back to 3.210 percent.

Traders have given two wildly varying reasons for the rapid rise in Treasury yields. One argument is that US tax compromise between the White House and legislative Republicans, which would extend all of the Bush-era tax cuts and cut payroll taxes, would add as much as one percent to US GDP over the next two years.

The second is that proposed US tax plan does not include any spending cuts so the federal deficit will only balloon further over the next decade.

“The likely extension of the Bush tax cuts and the other measures agreed upon by the Obama administration and congressional Republicans imply a further deterioration in the fiscal outlook, adding $1 trillion to the budget deficit,” Jim Steel, HSBC analyst, explained.

“Though a wider deficit is supportive of gold in the longer term, this has also led to higher US consensus GDP growth forecasts by at least 0.5 percent,” he added. “This has helped push bond yields higher, which in turn have weighed on gold.”

Since breakeven inflation in the US remains largely unchanged, Standard Bank noted, implied real interest rates in the US have also risen. The 10-year implied real interest rate in the US is now at one percent, up from 0.6 percent at the end of November.

“A rise in real interest rates is bearish for gold and seems to be capping upside at the moment; however, despite the latest rise in US real interest rates, the fact that the level of real rates remains low still makes gold investment attractive,” Standard Bank analyst Walter de Wet said.

Gold prices were supported on Thursday by a healthy amount of dip-buying.

“The long-term positive gold trend remains unchanged so modest declines through year-end should bring out bargain-hunters who are looking to long gold,” a US-based gold trader said.

“Also, there is still a lot of nervousness about global currencies and the sovereign-debt crisis in the eurozone so gold’s safe-haven appeal isn’t going to dissipate any time soon,” he added.

On Thursday, Fitch Ratings downgraded Ireland to BBB+ from A+, citing macro-financial risks emanating from the banking sector combined with the highly uncertain economic outlook and a loss of market access.

In other precious metals, silver for March delivery on Comex was up 42 cents at $28.680 per ounce.

“We believe silver is more vulnerable to further correction than gold,” HSBC’s Steel said in a note, citing higher mine production and comparatively greater retail investor participation in silver.

“The larger retail component tends to make the silver market more highly leveraged than gold,” he added.

Platinum for January delivery on Nymex was down $5.21 at $681.40 per ounce, while the March contract for palladium gained $12.25 to $728.95.

source