Where we are: Gold (COMEX) is trading at 4689.9, up 126.6 or 2.77% on the day, fueled by hopes of de-escalation in the Middle East. Overnight, bullion traded in a wide range between 4556.1 and 4733.9. This rally marks a significant recovery from recent selling pressure, pushing it well above yesterday’s close.
What’s driving it: A fragile ceasefire in the Gulf is the primary driver, diminishing fears of further energy-price inflation that had reinforced expectations for tighter monetary policy. The prospect of a US-Iran deal, potentially involving sanctions relief and nuclear negotiations, adds to the downward pressure on oil and therefore inflation expectations. This is amplified by a weaker dollar, as the DXY slides to 97.79. Rising real yields had presented a headwind for gold, but the current risk-on environment is overpowering that influence.
- US 10Y real yields rose to 1.95% as of May 4th. This is a headwind, but being outweighed by the risk off move for now.
- Reuters reported that gold climbed over 3% as Middle East peace hopes drag down dollar, oil.
- Net non-commercial gold positioning remains modestly long at +159,571 contracts.
NY session focus: Today’s ADP Non-Farm Employment Change data at 08:15 ET will be closely watched for its impact on US rate expectations, and will affect the current risk-on sentiment if the number is far from the 118K consensus. Key levels to watch are 4700 as an immediate resistance and 4600 as support. The current trade is to ride the bullish momentum, but the risk is a hawkish surprise from the ADP data. The pain trade would be a sudden collapse of ceasefire hopes, reigniting inflation fears and sending gold tumbling.