Gold staggers to a weak start in Q4 but yields may be close to peaking
The gold market did not get a great start to the fourth quarter after seeing nine consecutive days of losses. This was gold’s longest daily losing streak in seven years. Although gold is ending Friday off its fresh seven-month lows, it is still ending the week with a 1% loss. While there is some hope for gold as it looks to hold critical near-term support levels, the precious metal will continue to be sensitive to surging bond yields.
While gold was probing its March lows, the U.S. bond market saw a significant selloff in long bonds, which has driven yields higher. This week, the 30-year yield rose to 5% for the first time since 2007. At the same time, the yield on 10-year notes rose to 4.8%, a new 16-year high.
This bear steeping in the yield curve has created significant headwinds for gold and silver as it raises the opportunity costs of the non-yielding assets. However, these challenges could be short-lived because rising bond yields are also creating significant risks for the economy. Many analysts have pointed out that this bear steepening after an inverted yield curve is another strong recessionary signal.
Analysts have also noted that the current bond market selloff is similar to what was seen in 1987, just before the U.S. fell into a brief recession. And while history may not always repeat itself, it does often rhyme.
In a recent note to Kitco News, Mike McGlone, senior market strategist at Bloomberg Intelligence, said that while bond yields have the momentum to go higher, he believes this is the last gasp of the market. "I feel things in 4Q 2023 are shaping up like some combination of 1987, with the bond price collapse before the stock market crash, and 2008, when crude oil peaked," he said. "In 2008, gold went from about $1,000 an ounce down to $700, before embarking on the rally to the 2011 high around $1,900. I see parallels.”
Sentiment in the gold market looks pretty bleak; however, it's also important to note that the gold market remains relatively healthy even with the latest selloff. Some analysts have pointed out that even with the selloff in the bond market, models suggest gold prices should be well below $1,800 an ounce. "Gold's weak correlation with real yields could be the initial signs of a breakdown in the U.S. dollar's international appeal," he said. "Gold is the only way central banks in emerging markets can give them independence from the monetary mayhem that is the result of the U.S. dollar.”
According to the World Gold Council, central banks bought 77 tonnes of gold in August, an increase of 38% over July's purchases, and central banks have bought 219 tonnes of gold over the last three months.
"This recent buying suggests that we have now firmly moved past the net selling we saw in April and May, which was primarily driven by heavy, non-strategic selling from Turkey,” said Krishan Gopaul, senior analyst at the WGC, in the report. "We are therefore confident that the long-term trend of healthy central bank demand remains in place.”
Before investors completely give up on gold, there is one more story we wanted to highlight this week that shows gold’s important role in financial markets. According to Incrementum AG’s closely-watched gold/beer ratio, the precious metal has consistently insulated beer lovers from rising costs during Europe's Oktoberfest celebrations.
On that note, Prost! Have a great weekend! To all our Canadian readers, we wish you a happy Thanksgiving, and for Americans, happy Columbus Day.
Source: https://www.kitco.com