Spot gold prices sank immediately after the London close on Thursday, briefly dipping below $660 per ounce as support from European traders vanished.
"Gold options trading over the last two weeks was very bearish," one independent trader had said to Reuters at the Comex earlier.
"Hedge funds and mutual funds had been buying a lot of puts," he went on.
And as the London session ended, those US sell orders were let free to push the spot gold market 2% lower from its intra-day versus the Dollar.
The trigger? “Everything has to do with interest rates at the moment,” as one credit market player at J.P.Morgan in London said to Bloomberg – and Thursday saw the yield on 10-year US Treasury notes pushed above 5% for the first time since August.
“People are reducing their high-yield holdings in light of the risk-free rate at 5%,” the credit trader explained.
Locking in 5% yields from US government bonds, Wall Street institutions also pulled money out of European and US equities. (Could Thursday’s action mark the return of the infamous “bond market vigilantes”?)
By the close in Frankfurt, the Eurofirst 300 index had lost 1.1% for the day, while the S&P in New York traded 0.8% lower from Wednesday night’s finish.
The price of credit default swaps – a form of insurance used by bond investors – rose more than 2.5% for portfolio managers holding US corporate debt.
Insuring corporate bonds issued in Euros became nearly 4% more expensive today according to iTraxx CDS data.
Most spectacularly of all, those sudden 5% yields on US Treasuries also pulled money out of short Dollar positions in the currency markets.
The Bank of England had earlier voted to keep its interest rates on hold today, disappointing Sterling bulls once again.
By the close in London, the Pound had dropped a massive 2¢ to the Dollar – and lost ¥3 to the Japanese currency – in its biggest one-day move since mid-March.
The European single currency also lost ground against the Dollar, and those currency losses helped cap the drop for European and British investors wanting to buy gold today.
Even so, the metal still stood at a 1.5% discount from Thursday’s intra-day high by lunchtime on Wall Street.
“As interest rates go higher and higher, it makes the purchase of any commodities, which never pay interest or have yield, a poor judgment,” reckons Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois.
His comment came after the European Central Bank raised Eurozone rates on Wednesday, and the Reserve Bank of New Zealand suddenly raised its lending rate to an all-time record high of 8% on Thursday.
But mistaking high nominal interest rates with a decent return on cash savings could cost investors dear in the long run.
To get the full story on what’s really happening with global interest rates right now, click here to keep reading...