Gold Faces New Headwinds As Bond Yields Hit 7-Year High
(Kitco News)- Move over U.S. dollar. The goldmarket, trading under $1,200 an ounce, is facing new headwinds as long-termU.S. bond yields hit new multi-year highs.
For much of the year, thenegative correlation between bond yields and gold prices has broken down.However, some analysts have said that with 10-year yields hitting 3.25%, itshighest level since 2011, the relationship could come back into play.
So far the gold market is takingthe rise in bond yields in stride, but prices remain below the keypsychological level of $1,200. December gold futures last traded at $1,191.30an ounce, up 0.23% on the day.
Sean Lusk, director of commercialhedging with Walsh Trading, said that he could see gold prices struggling inthe short term because of the current market environment; he said there is arisk that prices break their August lows if bond yields move much higher.
He added that bond yields, whichmove inversely to the price, have room to move higher as the U.S. economycontinues to grow and inflation pushes higher.
“If bond futures continue to selloff, I don’t see how precious metals can rally,” he said. “Ultimately we haveto see higher bond yields because the U.S. economy remains strong.
“If we break below $1,167, thenthere is not much in the way back down to $1,100 and then $1,050 an ounce,”Lusk added.
Daniel Ghali, commoditystrategist at TD Securities, said that not only are bond yields moving higherbut because inflation is still relatively low, real yields are pushing higher,which has the biggest impact on gold prices.
Gold, which does not provide ayield, sees its opportunity costs rise in an environment of rising interestrates.
While gold has room to movelower, Ghali said that TDS doesn’t see marginally lower prices in the near term.
“Ultimately rates are still atlow levels and we don’t think they will be going much higher from here,” hesaid. “We don’t see gold prices going much lower but will remain range boundthrough the rest of the year.”
Ross Strachan, senior commodityeconomist at Capital Economics, said that he doesn’t think that rising bondyields will have much impact on gold prices going forward.
“We expect that rising bondyields are already baked into the gold price,” he said.
Strachan added that investorsalso need to pay attention to why bond yields are rising. Although a strongeconomy will drive yields higher, weak demand for U.S. debt can also have thesame effect.
Strachan said that if bond yieldsare moving up because the market is saturated, this could weigh on equitymarkets, which could be positive for gold.
“A potential correction inequities is a reason why we are bullish on gold prices in the next few years,”he said.
Lusk said that he also seespotential for gold despite the fact that bond yields are moving higher.
He noted that gold could findsome support by the end of the month as focus turns to the impending U.S.mid-term elections. If Democrats can regain control of the Senate and even theHouse, Lusk said that he would expect to see a rise in the domestic politicaluncertainty, which should be good for the yellow metal.
David Madden, market analyst atCMC Markets noted that higher bond yields are impact equity markets but headded that a strong U.S. dollar continues to make gold unattractive.
“Investors are worried the Federal Reserve willcontinue down their path of hiking interest rates and equities are beingdropped. For nearly one week, US stocks have been losing ground, and the risein US government bond yields has been the driving factor. Adding to that, themove higher in yields isn’t showing any signs of slowing down, so we might seefurther pressure on stocks,” he said. “Today is additional proof that gold is no longerbenefitting from the flight to quality play, as stocks are lower, and so is thecommodity.”
By Neils ChristensenFor Kitco News
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