Gold price gains to 4-month high as dollar sinks

New York (Jan 10)  Gold prices shot higher Wednesday, trading at their highest in nearly four months, as the dollar tumbled against major rivals and offset a gold-negative rise in bond yields.

February gold GCG8, +0.72%  advanced $11.60, or 0.9%, to $1,325.30 an ounce, holding above the psychologically significant level of $1,300, which it reclaimed in late December, and snapping what had been back-to-back declines. The exchange-traded SPDR Gold Shares GLD, -0.46%  was up 0.7% premarket.

The ICE U.S. Dollar Index DXY, -0.56% —a gauge of the greenback against a half-dozen rivals—slid 0.6%, wiping out a three-session uptrend for the currency. The dollar fell more than 1% against the yen after the Bank of Japan’s move this week to trim long-dated government bond purchases. That set up the U.S. currency for its biggest two-day pullback against the yen in some eight months.

Because most commodities are priced in dollars, strength in the currency can create a headwind for assets like gold, detracting from its appeal among buyers using weaker currencies. The recent downdraft for the buck also comes as a number of Federal Reserve members have stirred some doubt about the pace of interest-rate increases in 2018—with some pointing to it potentially exceeding the two or three that the market has priced in—due to concerns that recent fiscal stimulus measures could overheat the economy.

Gold gained even as the yield for the 10-year benchmark note TMUBMUSD10Y, +1.51%  climbed 3.1 basis points to 2.59%, according to FactSet data. Higher yields, which move opposite bond prices, typically dull the appeal of nonyielding bullion, but gold muscled ahead.

U.S. yields had already started to rise on Tuesday after the Bank of Japan cut its bond purchases, sparking chatter that the Japanese central bank is getting ready to end years of ultra-loose monetary policy. That sent the 10-year rate above 2.5% and to its highest level since March.

Then on Wednesday, bonds were further sold off after a Bloomberg report that China is considering halting or cutting its purchases of U.S. government paper. Sources told the news outlet that China found that U.S. bonds were becoming less attractive and that trade tensions with the U.S. could provide a reason to stop buying American government paper.

“A major supply of bonds from the U.S., the U.K., Japan and Germany is hitting the market at a time when concerns are being raised that the bull market in bonds, which has lasted for more than 25 years, could be coming to an end,” said Ole Hansen, head of commodity strategy, at Saxo Bank. “Overall, however, real yields, an important driver for gold, remain range-bound, with rising U.S. nominal yields being offset by rising inflation expectations.”

Hansen said gold momentum looks solid. “An unlikely break below $1,270/oz would be needed to derail gold’s new strength,” he said.

In other trading, March palladium PAH8, -0.52%  fell $3.85, or 0.4%, to $1,094.30 an ounce. It cleared $1,098 a day earlier for a settlement that was the highest on record, based on FactSet data going back to 1984.

Read: Palladium prices could top gold as record rally continues

Sister metal platinum saw its April contract PLJ8, +0.14%  gain 0.3% to $974.70 an ounce. Meanwhile, silver for March delivery SIH8, +0.79%  rose 16 cents, or 0.9% to $17.17 an ounce, while the iShares Silver Trust SLV, -0.74% rose 0.8%.

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