Gold Continues To Face Off With Treasury Yields

Gold Continues To Face Off With Treasury Yields

Many factors affect the gold price, but Treasury yields have been the one factor that’s been weighing more heavily than the others of late. Last week, the Federal Open Market Committee doubled down on its dovish stance, boosting gold prices as a result.

Q4 2020 hedge fund letters, conferences and more

The FOMC said it would allow inflation to run above its 2% target for an extended period, which weighed on the U.S. dollar. The dollar is generally negatively correlated with gold prices, so at first, the news was good for the yellow metal. However, Treasury yields have continued to rise in the days since the FOMC meeting last week, bringing the gold price back down again.

Treasury yields off and running

On Wednesday, Edward Moya of OANDA said gold prices continued to stabilize as emerging geopolitical risks triggered some safe-haven flows. Selling by gold exchange-traded funds continued for the 27th straight day, but Moya added that the selling pressure is starting to ease.

“Gold seems like it’s stuck doing the tango with Treasury yields,” Moya explained. “The preliminary Markit PMIs showed prices rose to the highest level since the series began, which helped push the 10-year Treasury yield higher and gold prices lower.”

The gold price continued to consolidate on Wednesday, demonstrating that investors didn’t expect much from the second day of testimony by Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen. Instead, they are focusing on the next round of Treasury auctions.

“Foreign demand is expected to remain strong, but if demand is surprisingly weak, the bond market selloff could intensify quickly,” Moya added.

Why gold and Treasury yields are negatively correlated

Gold and Treasuries are both considered safe-haven assets, so some correlation between them is clear. However, the gold price is correlated with bond prices, while bond prices are negatively correlated to yields. The lower the price on the bond, the higher the yield, and vice versa.

The reason for the negative correlation between gold and yields is because by holding gold, investors lose investing opportunities. Gold doesn’t bear any yield, so when bond yields go up, the gold price goes down because capital flows out of the yellow metal and into bonds.

In other words, investors receive a return on their bonds when the yield goes up, but they receive no such return on gold. Thus, although both are safe-haven assets, they perform different functions in a portfolio. When yields fall, gold becomes more attractive because there is no benefit to holding bonds.

Gold price ignores other economic data

Usually, the gold price reacts to economic data, but it has been shrugging off these numbers while Treasury yields have shifted higher and higher. For example, the Commerce Department said durable goods orders in the U.S. declined 1.1% last month, marking the first decline since April 2020. That suggests the months-long manufacturing rebound has paused. Usually, declining economic data would give the gold price a boost, but that didn’t happen on Wednesday.

Continued talk about inflation and the Fed’s statement that it will allow inflation to run above 2% for a while would normally be good for gold as well. Usually, such talk would be bad for bonds as well because it means that the yield investors earn on them will be worth less and less as time goes on. After all, it means the value of the dollar is reduced.

However, higher yields have remained the big story for gold. Bond yields typically go up when interest rates increase, which is exactly what has happened recently despite the Fed’s decision to hold the federal funds rate close to zero for the next few years. Mortgage rates and other interest rates have been climbing as banks tighten up their lending.

A contrarian case for gold

As higher Treasury yields drive the gold price lower, the story for gold has switched around. The once-bullish story has turned bearish due to the economic recovery and rising yields. As a result, the contrarian case is now a bullish one, as it seems nothing can stem the tide of falling gold prices.

However, not everyone is convinced that gold will continue to fall. There’s no guarantee that the economic recovery will occur as quickly as most investors are expecting. Economic data points have been mixed for some time, so it doesn’t look like the recovery is V-shaped as most were hoping.

Instead, the recovery has been K-shaped, with certain industries recovering while others stagnate. For example, e-commerce is booming, but hospitality and airlines are struggling. Meanwhile, unemployment numbers remain high, which would also usually be good for gold.

Gold technicals have improved, but it doesn’t matter

Saxo Bank Head of Commodity Strategy Ole Hansen said in a recent note that even though the technical outlook for gold has improved, it “remains unloved by investors.” Total holdings in gold ETFs slumped to a nine-month low at 3,148 tons, marking a 9% decline from the peak last year. Hedge funds have also cut their net long in COMEX gold futures close to its lowest level in two years at 42,000 lots, an 85% decline from the February 2020 peak.

Hansen added earlier this week that buyers returned to gold for the first time since January, and hedge funds’ net long position jumped 30% to 54,700 lots in a combination of new longs and short covering. However, the yellow metal couldn’t hang on as it continues to take a beating from yields.

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Source: Gold Continues To Face Off With Treasury Yields

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Gold & Silver Prices Recorded Best Year Since 2010

Gold and silver both had a strong performance in 2020, with the gold price in US dollars rising 25.12% during the year, and the silver price in US dollars rising an impressive 47.82%. These returns are based on opening prices of gold and silver on 1 January 2020 of $1517.3 and $17.86, respectively, and closing prices on 31 December 2020, of $1898.50 and $26.40, respectively.

Gold’s Continued Bull Run

With a 25.12% return in 2020, gold continues the strong run it recorded in 2019 when the gold price rose by over 18%. US dollar gold in 2020 also had its best year since 2010, a year in which it rose by 29.5%.

The 2020 low for the US dollar gold price was seen in the last week of March when the price dipped briefly below $1500 on the back of stress in the London gold market and the widening of spreads between the London spot price and COMEX futures prices. The 2020 high for the US gold price during the year was reached on 7 August, when the price touched US$ 2067.60 per troy ounce, after climbing consistently from the last week of March. A lot of that surge was during a two-month period from early June to the August high, when the gold price rose by $370 between 7 June and 7 August.

US dollar gold generally ebbed from that August high until the end of November, when it traded at $1767 on 30 November, before resuming its climb throughout December to end 2020 in the $1898 range.

The gold price also performed strongly in other currencies during 2020, for example, rising by 22.89% in Singapore dollars, 21.35% in British pounds, 22.63% in Canadian dollars, 14.85% in Euro and 13.93% in Aussie dollars.  

Turning to silver, the 47.82% rise in US dollar silver price in 2020 also gives silver its best year since 2010, when it rose by 83%. Interestingly, silver also rose by a similar 47% in 2009, so could 2020 be presaging a very strong silver price showing for 2021?

The 2020 low for the US dollar price was also seen in March during the wider market panic, with a low price of $12.17 recorded on 19 March. Like gold, silver also resumed its ascent from that March low and also peaked on the very same day, 7 August at $29.3 per troy ounce. From low to high, that was an incredible 141% move in just over 4 months. Much of that upsurge occurred in three large jumps over late July and early August where the price rose a full $10 over 15 trading days.

Silver price performance in US dollars, 2020. Source: BullionStar Charts

Like gold, the US dollar silver price generally ebbed and flowed lower from August to the end of November, hitting a low of $22, also on 30 November. However, again like gold, the US dollars silver price rallied throughout December 2020, adding over $4 to finish the year comfortably above $26.

Although the 2020 platinum price rise was more subdued than that of gold and silver, it still rose a respectable 11.14% during the year from an opening price of $965.5 on 1 January to a closing price on 31 December, at the time of writing, of $1073.10.

This article was originally published on the BullionStar.com website as part of a larger article, with the same title “As 2020 comes to a close, Gold and Silver record best year since 2010“.

By: Ronan Manly

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Here is our silver price forecast for 2021! Watch this detailed silver 2021 price prediction to see where the white metal might be headed in the coming year! The major question is: will silver prices go up in 2021? And as per the current outlook for silver prices, 2021 could be looking very promising indeed. So much so that as the silver price prediction would have it, the commodity could reach astounding highs of up to $75 per ounce. Many experts are certain of a tremendous rally in their silver 2021 forecast.

Investing The Latest Rise In Gold Is Just A Function of The Recent Weakness In The Dollar

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Last week was really a week of two halves as far as equity markets were concerned, with initial gains subsequently reversed, leaving markets down a little over the week as a whole.

A further escalation of tensions between China and the US, with the tit-for-tat embassy closure, was the most obvious reason for the change in market tone. But the continuing uncertainties over the prospects for the economic recovery may also have contributed.

Last week’s economic data on the face of it looked encouraging but in reality was rather less so. Business confidence recovered further in July and is now back above pre-Covid levels in the UK and Europe. However, these surveys basically just ask businesses whether conditions are improving or not. Given how dire the position was a couple of months ago, the fact that most businesses are now saying things are getting better is hardly a sign that the economy is back to normal.

Retail sales have also shown a sharp V-shaped recovery and in June, in both the UK and US, they had regained almost all their collapse in March/April. But again this is not as reassuring as it first looks. It is far from clear how much of this bounce just reflects one-off pent-up demand and will not be sustained going forward. Retail sales also only account for around 30% of total consumer spending. The recovery in spending on services etc. is likely to have been much more subdued.

In short, the debate over the strength of the recovery from here is alive and kicking, not least because the outlook is so dependent on how soon a vaccine is developed and rolled out and whether there is a major secondary spike in infections. Recent news has been encouraging on the former but discouraging on the latter, with infections still not under control in the US and also now picking up again in Europe.

The outlook hinges not only on the virus but also on the government’s policy response. For Europe at least, there was good news last week. At the eleventh hour after a marathon summit, EU leaders finally managed to overcome resistance from their more frugal members and agree an economic recovery package totalling €750bn or 5% of EU GDP. For the first time ever, the EU itself – rather than just individual countries – will issue debt to finance a mixture of grants and loans to EU states.

This week, it will be the turn of the US to try to agree a new fiscal stimulus package to replace the current support measures which expire at the end of July. As with the EU, the terms of the new package are being fought over tooth and nail, this time by the Democrats and Republicans.

One asset which has performed very well this year has been gold and its price rose a further 5% last week, breaking above $1900 and its previous high in 2011. The gold price is now up over 25% so far this year. Gold is the archetypal safe haven risk-off asset and one would expect it to do well in a time such as now of heightened economic uncertainty and geo-political tension.

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However, the scale of its gains are down in good part to the super low level of interest rates. Government bonds used to be an obvious source of protection for portfolios in the event of a major sell-off in risky assets. Now, by contrast, the scope for further declines in yields is minimal with rates already so low, and the ability for bonds to provide such protection is much reduced. In addition, with government bonds now yielding virtually nothing, the fact that gold pays no income is no longer a particular disadvantage.

These various factors mean gold should remain well supported for the time being and could well rise further. But one shouldn’t forget that gold is volatile. If and when we do eventually see a return towards normality, gold could well retreat significantly. After all, the gold price more than doubled in the three years following the global financial crisis, only then to unwind half of those gains over the following couple of years. Finally, for UK investors, there is also currency risk associated with investing in gold with part of the latest rise in gold just a function of the recent weakness in the dollar. Gold may be a risk-off asset but it is a risky one.

By Rupert Thompson, Chief Investment Officer at Kingswood

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As Gold Strikes a Record High, Analysts Think The Rally Has Only Just Begun

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Good morning, Bull Sheeters. There are patches of green in Asia (Shanghai) and Europe (Frankfurt), and the U.S. futures are ticking higher. Ahead of the opening bell today, we have jobless claims numbers, which could steal a bit of the thunder from tomorrow’s non-farm payrolls report. Meanwhile, gold climbs and climbs.

Let’s take a look at what’s moving markets.

Asia

The major Asia indexes are mixed in afternoon trade with the Shanghai Composite leading the way higher, up 0.3%. Investors have been growing increasingly wary of rising U.S.–China geopolitical tensions, and China seems to agree it’s pointless. Chinese Foreign Minister Wang Yi told state media a “new Cold War” would be a horrible idea.Never heard of Chongqing Zhifei Biological Products Co.? The Chinese pharma power is in relatively advanced stages in its COVID-19 vaccine trials, news that’s lifted the stock 256% this year through Wednesday. The stock is the best performer on the ChiNext Index.

Europe

The European bourses were lower out of the gates this morning, before climbing. Germany’s Dax was up 0.2% an hour into the trading session.London’s FTSE is the biggest loser, down 1.3% after the Bank of England held rates steady at 0.1% and warned the economy won’t recover to pre-COVID levels until the end of 2021.TikTok chose Ireland as the location to set up its first European data center, part of a €420 million investment.

U.S.

So much for a sleepy August. U.S. futures again look to extend the equities rally. The Nasdaq finished higher for a sixth straight day, closing at a new record, just below 11,000.Fiscal stimulus is top of mind for investors, and Round 2 talks on a coronavirus bailout package are still stuck in neutral with the White House signaling the next two days are make or break. Another batch of dismal jobless claims numbers could bring the sides closer together.There’s bipartisan support for as much as $25 billion in new aid for the airlines, and President Trump has given his support.Elsewhere

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Gold continues to rack up new records, it’s up 0.6%. The dollar is flat, off its lows. Crude is sinking.

Gold rush

The Nasdaq and gold are both hitting fresh records daily. And, if analysts are to be believed, they both have room for further growth.

Bank of America yesterday reiterated its 18-month forecast of gold at $3,000 per ounce. (At one point, the shiny stuff was trading this morning at a record $2,060/oz.) And, it’s looking increasingly likely the Nasdaq will notch its seventh straight day of gains later today.

But Nasdaq bulls and gold bugs are betting on two very different scenarios. The former sees a post-COVID world that’s digitally powered by big data, virtual meetings and a further investment in the so-called fourth industrial revolution.

Gold is rallying, in large part, because investors are wary about the fragility of the global economy …read more

Source:: Fortune

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Gold Nears $2,000 an Ounce as It Surges to All-Time High in an Uncertain World

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Spot gold blasted past its longstanding record as the dollar plunged and concerns about the global economy boosted demand for havens. Silver rode on its coattails, jumping to the highest in nearly seven years.

Bullion’s move—which may put it on track to take out $2,000 an ounce—came as a gauge of the dollar sank to the lowest in more than a year amid negative real rates in the U.S. and bets that the Federal Reserve will keep policy accommodative when it meets this week. Unrelenting investor demand has helped fuel price gains, with inflows into gold-backed exchange traded funds this year already topping the record set in 2009.

Spot gold surged to $1,944.71 an ounce, beating the previous high set in 2011 by more than $20. On the Comex, futures rose to a record of $1,966.50 as a contract roll provided a further boost to its rally.

Investors have turned to gold as the coronavirus pandemic’s hit to global growth underpinned its status as a haven. But the metal’s getting support from a long list of factors: geopolitical tensions are rising, real rates have tumbled, the dollar is weaker, and government and central banks worldwide have unleashed vast stimulus measures to try and boost economies.

“Strong gains are inevitable as we enter a period much like the post-GFC environment, where gold prices soared to record levels as a result of copious amounts of Fed money being pumped into the financial system,” with a weak dollar and negative real rates providing further impetus, said Gavin Wendt, senior resource analyst at MineLife Pty. Gold may consolidate before setting its sights on $2,000 and above in coming weeks, he said.

The current environment has even raised the specter of stagflation, a rare combination of sluggish growth and rising inflation that erodes the value of fixed-income investments. In the U.S., investor expectations for annual inflation over the next decade have moved higher the past four months after plunging in March.

U.S. bond markets have been a key metric to watch in determining the path for gold, with the metal serving as an attractive hedge as yields on Treasuries that strip out the effects of inflation fall below zero.

Gold and bond traders alike will get a steer from the Fed this week, as officials meet July 28-29. Expectations are they’ll keep interest rates near zero, while markets will also be watching for any signals around shifts in strategy.

changelly5The meeting may be a platform for a strong message that change is coming, opening up the possibility for more unconventional policies further down the line, according to Chris Weston, head of research at Pepperstone Group in Melbourne. “If we think about real yields and what the Fed is doing, it just suggests to me that it’s a matter of time before real yields continue to trend lower and gold goes higher.”

Increasing concerns about the virus pandemic as well as deteriorating relations between the U.S. and China add to gold’s allure, and most analysts are bullish on the metal’s outlook. Goldman Sachs Group Inc. said the metal could reach $2,000 in the next 12 months, and Citigroup Inc. puts a 30% probability on prices topping that level by the end of this year.

Spot gold traded at $1,933.44 an ounce by 7:32 a.m. in London. Newcrest Mining Ltd., Australia’s biggest gold producer, advanced as much as 5.6% in Sydney, as Zijin Mining Group Co.’s Hong Kong-listed shares rose as much as 7.9%.

Silver followed bullion higher, jumping more than 7% to $24.3993 an ounce, the highest since 2013.

By Ranjeetha Pakiam / Bloomberg

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