Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
Why Oil Prices Fell -- Stockpiles or Price Pattern? - 18th Aug 18
Why The Uranium Price Must Go Up - 18th Aug 18
Land Rover Discovery Sport 90% Motorway Driving MPG Fuel Economy in ECO Mode - 18th Aug 18
GDX Gold Mining Stocks Q2’18 Fundamentals - 18th Aug 18
SPX Losing Gains - 17th Aug 18
What Gold Is Not - 17th Aug 18
Dollargeddon - Gold Price to Soar Above $6,000 - 16th Aug 18
Stock Market Higher Again, Correction Over? - 16th Aug 18
Up Your Forex Trading Game - 16th Aug 18
Large Caps Underperformance vs. Small Caps is Bullish for Stocks - 16th Aug 18
“The Big Grab” - Failing Pension and Retirement System - 16th Aug 18
How US Indo-Pacific Vision Forgot Asian Development - 16th Aug 18
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 18
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 18
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 18
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

Will Surge in Bond Yields Smash Gold?

Commodities / Gold and Silver 2018 Jan 19, 2018 - 10:09 AM GMT

By: Arkadiusz_Sieron

Commodities

Yields on U.S. Treasuries have leaped recently. It will wreck the yellow metal. Or maybe not.

Yields Reach New Heights. Breakthrough for Gold?

Last week, we wrote that concerns emerged that China could stop or slow buying the U.S. Treasuries. The U.S. bond yields reacted strongly. We noted that in theory it should sink gold, but the usual “correlation between bullion and Treasury yields broke down thanks to the depreciation of the U.S. dollar, which supported the gold prices”. Due to the importance of that issue for the gold outlook, we continued to monitor the developments in the bond market to keep investors updated.


Let’s look at the chart below. It shows that yields on 2-year U.S. Treasuries jumped on Tuesday to 2.03 percent, the highest level since 2008. And one can also see that 10-year Treasury yields hit 2.54 percent, the highest level since the beginning of 2017.

Chart 1: The price of gold (yellow line, left axis, London P.M. Fix, in $), the yields on 10-year Treasuries (red line, right axis, in %), and the yields on 10-year Treasuries (green line, right axis, in %) over the last ten years.


Many analysts assert that soaring yields will scupper the golden ship. But the price of the yellow metal rallied last week. It dropped slightly on Tuesday, but it rose again yesterday. Anyway, gold doesn’t look as casualty of rising yields. At least so far. Why?

Real, not Nominal, Rates Matter for Gold

One of the reasons behind the counterintuitive gold’s reaction is that real interest rates didn’t soared. Of course, they also jumped, but remained within the trading range seen since 2017, as one can see in the chart below.

Chart 2: The price of gold (yellow line, left axis, London P.M. Fix, in $) and the U.S. real yields (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security, in %) over the last five years.


Climbing nominal yields with steady real interest rates indicate that investors expect that inflation hydra may finally raise its ugly head. Indeed, the recent data shows that the Producer Price Index increased 2.6 percent in 2017, the fastest pace in six years. The annual rate of inflation in consumer prices slipped from 2.2 percent to 2.1 percent in December, but the core CPI edged up from 1.7 percent to 1.8 percent last month. Gold may not be the best weapon to use against hydras, but it is perceived to be a good hedge where investors may safely hide their wealth.

Weakness in Greenback Supports Gold

Another key factor is that rising yields haven’t helped so far to halt the decline in the U.S. dollar. However, there might be a rebound in the greenback, at least in the short-term. We saw the first potential signs of that yesterday, when the dollar rose from a three-year low. Today, the earlier downward trend reestablished, but there might be some consolidation in the euro, and thus in gold as well, ahead of the ECB’s policy meeting next week. Especially that the ECB officials have recently sent some dovish signals. Vitor Constancio, the ECB vice president, said he did not rule out that monetary policy would still continue to be “very accommodating for a long time”, while Ewald Nowotny told reporters that the euro’s recent strength against the greenback is “not helpful”.

Conclusions

The U.S. bond yields continued their rally. Gold didn’t plunge as the real interest rates remained within the sideways trend. A buildup in inflation could push the Fed to raise interest rates more aggressively, but the U.S. central bank seems to remain behind the curve. Higher inflation would lower real interest rates, which should support the gold prices. The weakness in the U.S. dollar is another key tailwind in the gold market. There might be a reverse in the EUR/USD exchange rate ahead of the ECB’s monetary policy meeting next week. Gold would decline, then. But if the eurozone’s economic expansion continues, the bearish trend in the dollar may remain with us, which would be supportive for the gold market. We will elaborate on this in the February edition of the Market Overview. Stay tuned!

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules