The reasons why gold prices are tanking

New York (Jan 12)  TD Securities blamed gold's woeful performance on higher treasury yields, greater risk appetite and recent Democrat wins.

The bank published a metals update last week.

On Friday a dramatic $66 price decline took gold prices below their 200-day moving average for the first time since December 1, 2020. As of 4:48 PM EST gold’s most active February 2021 Comex contract is currently up by $11.60 and fixed at $1,847.00.

"Sharply higher Treasury yields, a backup in real rates along the curve and firm risk appetite in response to growing expectations of additional economic support from the coming Biden administration, following the Democratic victories in the Georgia Senate elections were key drivers responsible for gold's poor performance," wrote the report's authors.

The bank went onto write that the firm U.S. dollar and the steeper yield curve have created a "...structure for gold forwards resulted in a more expensive carry environment, which seem to have prompted specs to shed recently accumulated logs."

Gold should have gained support from the weak payrolls report last week, signaling a sputtering recovery, but the news was not able to stem gold's decline.

The Democrats' win is not as sure as it seems. The authors note that despite sweeping both the Senate, House and presidency, it is still doubtful whether the Biden administration will be able to pass a large stimulus.

"Even if they do pass, the output gap will be very large for a prolonged period and it is likely inflation will not materialize much after oil prices flatten into 2021, which should prompt the Fed from allowing the curve to steepen materially," writes TD Commodities.

"Real rates need to remain firmly in accommodation mode for the US economy to recover post-pandemic. After all, a liquidity crisis has developed into a solvency crisis, and there will be fewer businesses left to employ Americans for years, and income support programs will end before the economy fully recovers.

Regarding catalysts that could take gold higher, TD said to keep an "eye out for economic activity, vaccine program progress and Biden's ability to sell a new aggressive stimulus agenda as drivers of the gold market.

"We still judge that gold has a material upside, with $2,000 in the cards over the next twelve months."

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