By Bruce Blythe
At A Glance
- The Federal Reserve's ongoing effort to prevent the US Treasury yields further and further downside gold, some analysts say.
In September, the Fed hiked its benchmark funds to a target range of 2 percent to 2.25 percent, the third increase in 2018 Many analysts expect another Fed rate hike in December.
Highs and Lows
COMEX gold futures are already about 12 percent from a 20 -month high of $ 1,369.40 at ounce reached in April, based on the closest-to-expiration contract. In mid-August, gold fell to $ 1,167, the lowest since January 2017.
Meanwhile, U.S. benchmark rates keep marching higher, with the yield on the 10-year Treasury note touching 3.24 percent in early October, a 7½-year high.
"Real yields are really key in setting directional bias for investors." gold, "said Callum Thomas, Head of Research, Topdown Charts Limited. Our charts point to gold at least $ 1,000, if not lower.
High Inflation Stokes Gold Bulls
Traders and other market professionals have tracked the gold market's performance against benchmark interest rates. Many consider gold a safe-haven – gold is always going to be worth something, so it's a good place to park money during broader market turmoil, in other words.
Historically, the distinction between nominal and real, inflation-adjusted rates is critical, as is the "opportunity cost" calculus of gold-versus-fixed-income assets, says David Andolfatto, an economist at the Federal Reserve Bank of St. Louis.
"If the nominal interest rate is high because inflation is high, as in the 1970s, that leaves the real rate of interest low. "The converse was true in the 1980s – gold was high."
Unlike a bond or share of stock, for example, gold "does not produce any income," Thomas says, "and, indeed, there is often a cost to hold gold – for security and storage, among other expenses."
Additionally, tighter Fed policy – higher rates and less liquidity – often strengthens the United States. dollar, which can therefore weigh on gold prices.
Gold Market Carving Out a Bottom?
In a measure of gold-versus-rates performance, Thomas noted a "large bearish divergence "between London-traded bullion prices and real US 5-year rates. As gold prices fell and rates rose, the gap between the two recently reached its widest point since late 2017.
The long-term view "suggests we could see further upside down in real yields," says Thomas.
Some observers say the gold market may be near a bottom, at least for the short-term, in part because Market centralized, adding a total of 193.3 metric tons of gold to their reserves in the first six months of 2018, up 8 percent from the same period in 2017.
Based on COMEX futures as of early October, gold is expected to remain above $ 1,200 at least through 2019. June 2019 gold, for example, what trading around $ 1,223.
As long as the Fed continues tightening policy, gold is likely to remain under pressure , Erik Norland, Senior Economist at CME Group, wrote in early October. Additionally, recent turmoil in emerging markets, if it spreads to other countries, could lead to dollar strength that further burdens gold.
Still, economic cycles and eventually tightening cycles. At some point, the Fed wants to stop raising rates.
"If the Fed overtakes it, it could prove to be extremely bullish for gold when the central bank is forced to reverse course and ease policy," wrote Norland.