Real Interest Rates Fall Yet Gold and Silver Drop Again

GOLD and SILVER sank against a rallying US Dollar on Tuesday even as longer-term US interest rates fell in the bond market, with the precious metals losing as much as 3.8% and 6.9% so far this week respectively since bullion trading in China closed for the Lunar New Year holidays.

Peace talks between the US and Iran as well as between Russia and Ukraine today continued in Geneva, Switzerland.

Global stock markets meantime slipped for the 4th time in 5 sessions, with US tech stocks falling as well as Europe's aerospace and defense sector.

With US traders returning from yesterday's Presidents' Day holiday, betting in the interest rates market edged forecasts for the Federal Reserve's end-2026 rate back above 3.00% per annum on Tuesday, after dipping to the lowest such prediction since early December.

But longer-term borrowing costs fell in the bond market, with one CNBC anchor saying that the 10-year Treasury yield, "the US benchmark, has plunged.

"Yet gold doesn't seem to care" − defying the formerly strong negative relationship between gold and the direction of bond yields.

Falling by more than 1/4 of a percentage point from a fortnight ago, the 10-year Treasury bond yield has now made its steepest 2-week drop since March last year.

Inflation-protected TIPS yields have meantime fallen to late-October levels on 10-year bonds. Back then, gold was trading up through $4000 per Troy ounce for the first time in history.

Yet gold on Tuesday fell to $4850 per Troy ounce in London trading, a new record high this time last month but 13.3% below end-January's spike to all-time gold price highs against the US currency.

"The change happened in 2022," says bullion bank HSBC's precious metals analyst James Steel, responding to CNBC.

"Until then, the real rate on the 10-year had a beautiful inverse correlation with gold. That broke apart, and gold is no longer as sensitive to real interest rates as it used to be.

"2022 is also when we got a lot of retail buying in the [small bar and coin] market, elevated geopolitical risk, and central-bank buying."

The Dollar on Tuesday meanwhile hit better-than-1-week highs on its DXY index, trading 2.0% above end-January's 4-year low against the world's other rich-economy currencies.

Like gold, silver also hit 8-session lows versus the Dollar, falling within 10 cents of $72 per ounce − a new all-time high when first reached during China's Christmas bullion trading chaos, but 40.5% beneath January's record top.

"Don't forget, we've had a lot of new money come into the precious metals market and we've had a parabolic rally," says HSBC's Steel.

"It really invites volatility" in gold and silver, says Steel. "That's going to be the word for this year."