Gold price is struggling now, but analysts say the looming bond crisis could change everything

Analysts explain that this environment is difficult for gold because rising yields on long-term bonds are increasing the opportunity cost of holding precious metals, which are non-yielding assets. Spot gold last traded at $4,993.60 an ounce, up 0.28% on the day.

Markets continue to be dominated by the ongoing chaos in the Middle East as the war in Iran keeps the Strait of Hormuz closed. The global supply chain disruption is driving prices for key commodities solidly higher; however, the market garnering the most attention is oil.

The conflict-induced energy crisis has pushed oil prices above $100 a barrel.

“Higher energy prices feed directly into inflation and, by extension, government bond yields, while also lending support to the US dollar,” said Hansen. “This combination has created a challenging environment for bullion. Rising yields increase the opportunity cost of holding a non-yielding asset, while a stronger dollar tends to weigh on demand from non-dollar investors. As a result, the normal safe-haven response has become less straightforward.”

However, with 10-year bond yields at their highest level since mid-January 2015 and 30-year bond yields above 5%, their highest level in two decades, the question becomes: when do higher bond yields become another headwind slowing economic activity?

“The market is struggling to cope with more than one theme at a time. Right now, it’s the higher oil price linked to inflation and yields that’s in the driving seat, but a continued rise in yields may well end up being positive for gold given the fiscal debt worries it raises,” he said.

“For gold to regain upside momentum, the market needs to see some easing in oil-driven inflation concerns, or renewed evidence that growth risks are beginning to outweigh inflation fears,” he said in a social media post on Wednesday.

Although the bond market selloff pushing yields higher has remained orderly — an important factor that has kept gold prices in check — analysts said sentiment can change fairly quickly with yields at key levels.

Doug Casey, founder of InternationalMan.com, noted in a social media post that for every one basis point rise in 10-year yields, the government’s average borrowing cost adds roughly $3.9 billion in annual interest payments. He pointed out that since the start of the war, the 10-year yield has increased by 63 basis points.

Fawad Razaqzada, market analyst at FOREX.com, said in a note on Wednesday that bond markets could be reaching a breaking point. He added that there is a risk of a deeper equity market correction because of surging bond yields.

“When inflation becomes more persistent, lenders demand higher long-term yields to compensate for the erosion of purchasing power. This should mean even higher bond yields, which is bad news for risk assets and good news for the dollar,” he said. “This, in turn, means that the fiscal backdrop in the United States continues to deteriorate. Treasury issuance is increasing rapidly at precisely the same moment investors are demanding higher compensation to hold longer-dated debt. The combination is difficult for bond markets to absorb smoothly. Not only will mortgage rates rise for consumers, but debt-servicing costs will also increase sharply for the government, which would need to be financed by issuing even more debt at even higher yields, or by reducing budgets in other sectors of the economy.”

Posted by:

Jack Dempsey, President

401 Gold Consultants LLC

jdemp2003@gmail.com