Yields versus gold

The past week has been an extremely exciting one for the financial markets – despite the summer holiday period. The heavy storm on Wednesday evening may have been the highlight of the week for those of us living in the Rhine-Main area though! Your author is extremely grateful for the fact that although the nearby stream overflowed its banks and flooded a lot of streets and lawns, the water level stopped rising a centimetre or two before reaching our cellar windows.

There was no bad weather or storm to clear the air in the markets, but many market players may have been caught unawares by the increase in yields in the US. Yields on 10-year US Treasuries reached 4.31%, their highest level in 16 years, and 30-year bond yields were even higher at 4.40%. Given that many market players often choose between gold and government bonds in their search for safe investments, such “safe” yields are likely to be just too tempting not to take advantage of. So it seems that money was taken out of investments in gold and put into government bonds instead. There was a slight reversal in yields last night – presumably profit-taking on short positions or closing out before the weekend. 

One side effect of the rising yields is that the US dollar also felt a tailwind and appreciated considerably against a lot of currencies until Thursday. The continued weakness of China's and Japan's currencies in particular, which depreciated to lows of almost 16 and 33 years, respectively, against the greenback, will likely impact demand for physical gold in Asia for the time being. The headwind was a little too much for gold prices, which is why the precious metal is now trading at slightly below the USD 1,900 per ounce mark, compared with USD 1,916 per ounce last Friday. 

After reaching its weekly high of USD 1,921 per ounce on the same day, gold then moved a little further to the south each day and reached new weekly lows – often mirroring the rise in yields. It then bottomed out at USD 1,885 per ounce yesterday, and is currently trading at around USD 1,893 per ounce as the European trading day begins. 

The price of Xetra-Gold fared somewhat better again due to the depreciation of the euro against the US dollar. During normal trading hours, Xetra-Gold was still trading at EUR 56.05 per gram last Friday, and reached its weekly high at EUR 56.35 per gram on Monday and low at EUR 55.70 per gram yesterday. We expect Xetra-Gold to start trading at a somewhat better EUR 55.95 per gram this morning.

Gold prices will likely keep more than a close eye on the development of US bond yields. The US Fed’s symposium in Jackson Hole at the end of next week is eagerly awaited, with many market observers hoping it will lend new impetus to the markets. 

I wish all readers a sunny and storm-free weekend, and a pleasant last few holiday days if you have them.