August 22, 2023


Gold Defies Rising Bond Yields: Physical Gold Interest

Despite recent selling pressures and bond yields rising to a fresh 15-year high, the gold market is displaying remarkable resilience. The yield on U.S. 10-year bonds reached 4.36%, its highest since late 2007, which traditionally would be negative for gold. The increase in bond yields usually impacts the precious metal's appeal as a non-yielding asset. However, gold prices have managed to maintain support, with December gold futures trading at $1,926.20 an ounce.

The Correlation Breakdown and Physical Interest

The observed resilience might be due to a correlation breakdown between gold and bonds, which Nicky Shiels, a metals strategist at MKS PAMP, attributed in a recent interview to low market volatility and increased interest in physical gold and silver. The interest in gold is burgeoning at a time when fast money is running short, and concerns over liquidity issues are leading to non-traditional correlations. These factors can explain the recent bids and the market's behaviour.

The Federal Reserve's Impact and Market Perceptions

Many analysts see potential benefits for gold from the growing market perception that the Federal Reserve is concluding its interest rate hikes. Markets are indicating an 85% chance that the central bank will keep rates unchanged next month, with a roughly 50/50 chance of one more rate hike before year-end. This belief that the central bank's tightening cycle may soon end could provide a cap to bond yields, offering further support to gold.

Expert Opinions and Economic Factors

Experts such as Adrian Day, President of Adrian Day Asset Management, noted in a recent interview that what will significantly influence gold prices is when the Federal Reserve halts tightening before gaining control over inflation. He alludes to the possibility of a bond market crisis in the U.S., though not immediately. Meanwhile, Ole Hansen, head of commodity strategy at Saxo Bank, sees gold attracting support amid uncertainties in financial markets and the prospect of further stimulus by China. These various perspectives contribute to understanding the complex dynamics affecting gold prices.

The Housing Sector and Gold

Gold's performance is not in isolation from other economic indicators. The recent decline in existing home sales by 2.2% to 4.07 million units last month and the struggle in the U.S. housing sector, as the Federal Reserve continues its aggressive interest rate hikes, is worth noting. Mortgage rates have averaged over 7% as of August 17, up from 5.13% last year, impacting new home buyers. Along with rising financing costs, higher home prices and limited inventories are affecting buyers, which is indirectly reflected in the gold market's behavior.

Historical Demand for Gold

Historically, gold has always been in demand due to its scarcity, appeal, and traditional use as a store of value. Its intrinsic value has made it a favored investment option and a hedge against inflation. Whether it was the Gold Standard era, where gold was directly linked to currencies, or modern times where it acts as a diversification tool, gold's allure has endured. The recent trends in physical interest and market dynamics only add to the relationship we have with this precious metal.

The gold market's recent resilience, even in the face of rising bond yields, is a multifaceted phenomenon. Factors ranging from the correlation breakdown between gold and bonds, the Federal Reserve's policies, expert opinions, and broader economic elements such as the housing market all contribute to the existing scenario. The physical interest in gold and the nuanced understanding of its relationship with other market elements paint a comprehensive picture of why gold continues to be an attractive asset. Its rich history as a desired commodity only adds depth to its current appeal, a reflection of gold's timeless value in human civilization.

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