Confusion and uncertainty reign in financial markets, helping gold prices rally in the face of higher bond yields, as traders continue to assess whether or not China will continue to buy U.S. Treasuries.
Early Thursday, Chinese officials denied reports that the central bank is looking at slowing its U.S. bond purchases. According to reports, while the central bank is diversifying its foreign-exchange reserves, it is not slowing or halting its purchases of U.S. Treasuries.
However, despite China attempting to reassure bond markets, the yield on U.S. 10-year notes remains at its highest level since mid-March.
Traditionally, higher bond yields are negative for the gold market because it increases the opportunity costs of holding the precious metal. Gold is holding near 3.5-months highs Thursday despite higher bond yields. February gold futures last traded at $1,322 an ounce, up 0.20% on the day.
Bart Melek, head of commodity strategy at TD Securities, said that gold is benefiting from growing uncertainty in financial markets. He added that while China has dismissed reports that it is looking at reducing its bond purchases, the idea is still out there.
"Once that idea is out in the marketplace, it is hard to take it back," he said. "I'm not sure that markets believe everything that is being said and that is good for gold."
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"This tells me that markets don't have a lot of confidence in the U.S. at the moment," he said.
Vince Lanci, founder of Echobay Partners, said that the fact that gold can rally in a higher bond environment is further proof that the yellow metal has entered a new phase of its bull market.
"China buying or not buying Treasuries in the short term is not the big factor... the fact that gold rallied on it means the path of lesser resistance, for now, is up," he said.
George Gero managing director at RBC Wealth Management, also said that he is optimistic on gold as he expects hedge funds to continue to diversify into gold as uncertainty and inflation pressures build in the marketplace. He added that it is possible for gold and bond yields to rise together.
"Right now the bond market is doing its own thing and so is gold," he said.
Gero added tthat for him higher bond yields signal rising inflation pressures, which will ultimately be positive for gold, which is seen as a hedge against inflation.
For Kitco News