Gold News

Gold Price Cuts Gains as Bond Yields Hit Pre-GFC Highs

GOLD PRICE gains of 1.9% for the week so far were cut to 1.3% in Asian and London trade Thursday, pulling the precious metal back to $1834 per ounce as global stock markets also struggled with commodity prices in the face of longer-term interest rates reaching their highest since the eve of the global financial crisis on strong US economic data.

Labor-cost inflation for US employers was revised sharply higher for the last 3 months of 2022 – cutting the pace of productivity growth almost in half from the prior quarter – while new and continuing jobless benefit claims fell on the latest weekly data, coming below analyst forecasts.

Betting on Fed policy now puts a 99.6% certainty on the US central bank ending 2023 with its key interest rate at 5.0% or above.

That's up from just 11.9% this time last month.

"Near-term challenges remain for gold and other precious metals on further rate hikes," Reuters quotes UBS analyst Giovanni Staunovo.

"[But] while market expectations around the Fed's stance are likely to guide Gold in the short-term," says a note from Australasian bank ANZ, "we see the macro backdrop remaining supportive for gold with the Fed pausing its hiking cycle and the USD resuming its downtrend."

Even so, "Gold prices [have come] under pressure," ANZ goes on, because "rising US yields weigh on the non-yielding yellow metal, as they increase the opportunity cost" of holding an investment in the precious metal.

Ten-year US Treasury yields today rose back above 4.0% per annum, back towards last fall's 15-year highs.

Two-year rates meantime rose above 4.90% for the first time since July 2007, eve of the GFC hitting Western housing markets and global banking solvency, and more costly on a nominal basis than over 3-in-4 of all trading days across the 15 years prior to that.

Chart of 2-year US Treasury yield and adjusted by core PCE inflation. Source: St.Louis Fed

Adjusted by inflation however, and using the Fed's preferred 'core' PCE measure for the cost of living, 2-year yields have now traded negative in real terms for more than 3 years running, having risen less than 0.4 percentage points above zero in the 24 months preceding the start of the global Covid pandemic in New Year 2020.

Data on US consumer-price inflation – running stronger than expected at New Year and helping dent the gold price last month – is due in mid-March, one week before the Federal Reserve's next policy decision.

For Euro interest rates, "The [half-point] hike already announced for March will not be the last," said European Central Bank policy-maker and Germany's Bundesbank president Joachim Nagel yesterday after new national data said the Eurozone's No.1 economy didn't see its jobless count rise in January and inflation then accelerated in February, reaching 9.3% per year on the harmonized CPI measure.

Making its first rate rises since 2011 over the last 9 months, the ECB has already hiked its key rates at the fastest pace since the single currency was formed in the late 1990s.

"I am [also] in favour of taking a steeper path of reduction" in the ECB's holdings of bonds through quantitative tightening, Nagel added, selling the pile acquired by QE and potentially driving longer-term interest rates higher as bond prices fall.

Yields on German 10-year bonds today reached their highest since 2011, with 2-year Euro swap rates at the highest since 2008.

But most of the increase in longer-term rates has been thanks to inflation, notes Finnish financial services group Nordea.

"Longer-term real rates haven't increased that much and that's also why financial conditions haven't tightened much."

Wednesday's strength in the Dollar gold price saw shareholders liquidate 0.3% of the giant SPDR Gold Trust (NYSEArca: GLD), marking the world No.1 gold ETF's second consecutive outflow and shrinking it to the smallest since mid-January.

Competitor gold ETF the iShares Gold Trust (NYSEArca: IAU) also shrank, taking its number of shares in issue down to the fewest since June 2020.

Despite this week's rebound in global gold prices, the premium for bullion landed in China today held near 4-month highs at $34 per ounce, offering more than 4 times the typical incentive for new imports into the metal's No.1 consumer nation and continuing to suggest strong local demand vs. supply.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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