(Kitco News, Fri. Oct. 20th, 2023) – As Israel’s war with Hamas intensifies, geopolitical uncertainty continues to support gold‘s safe-haven allure as the precious metal defies rising bond yields.
Similar to last week, gold is seeing solid buying Friday as investors want to hold some gold as insurance over the weekend. There are reports and rumors that Israel’s army could launch a ground offensive into Gaza over the weekend. This safe-haven demand has pushed gold prices to their highest level in three months. December gold futures last traded at $2,008.90 an ounce, up 1.4% on the day.
Gold prices have soared roughly 4% this past week from their Monday lows.
Phillip Streible, chief market strategist at Blue Line Futures, said that although gold’s push back above $2,000 an ounce is impressive, it’s not surprising given how negative sentiment has been in the space.
“Gold was so undervalued and now we are seeing some froth in the market because investors are all chasing themselves to own it,” he said.
David Morrison, senior market analyst at Trade Nation, said that gold is doing exactly what it is supposed to be doing in times of crisis.
“Gold has blown through all major resistance at $1,900, $1,950 and $1,980; I think the market wants to see $2,000,” he said. “It’s a little early to tell, but this could be the rally that takes prices to new all-time highs.”
Not only has gold seen an impressive rally in the last two weeks, but it comes as the Federal Reserve maintains its stance that it will hold interest rates in restrictive territory for the foreseeable future.
Thursday at the Economic Club of New York, Federal Reserve Chairman Jerome Powell said that the central bank is committed to bringing inflation down to 2%.
This stance, in part, has helped to drive long-term bond yields to fresh 16-year highs, with 10-year notes hitting 5% this week. However, some economists and market analysts note that concern over growing government debt in the U.S. is also an important factor driving bond yields higher.
Some analysts have noted that there is a fear that the Federal Reserve could lose control over the long end of the curve and this would force them to come and buy bonds, which would be positive for gold.
Morrison said that for the market, debt doesn’t matter until it does.
“$33 trillion is a pretty compelling reason why you might not want to hold a lot of U.S. treasuries,” he said. “Unfortunately, I don’t know how high yields would have to be to attract buyers.”
Ole Hansen, head of commodity strategy at Saxo Bank, said that along with geopolitical uncertainty, gold has now become an economic safe-haven.
“We believe that the continued surge in US bond yields has traders and investors growing increasingly concerned about US fiscal policy, and especially whether the recent jump in both real and nominal yields will break ‘something,'” he said in a note Friday.
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Powell’s hawkishness doesn’t scare the gold market as uncertainty remains elevated |
However, Hansen also noted that while speculative interest appears to be driving gold, a key investment segment remains reluctant to join the rally. Hansen pointed out that gold-backed exchange-traded products continue to see their precious metals holdings decline.
“Asset managers, many of which trade gold through ETFs, continue to focus on US economic strength, rising bond yields and potentially another delay in peak rates as reasons for not getting involved,” Hansen said. “The cost of funding a non-interest-paying precious metal position remains elevated and has been a significant driver behind the year-long reduction in gold positions held by asset managers. In recent updates, we have argued that this trend would likely continue until we see a clear trend towards lower rates and/or an upside break forcing a response from real money allocators.”
Tavi Costa, portfolio manager at Crescat Capital, said in a social media post that gold’s push to $2,000 could be a sign that gold investors are starting to anticipate some yield curve control from the Federal Reserve.
“The government can’t keep exponentially worsening its debt problem while the Fed deliberately increases the cost to service it,” he said. “We are facing a trifecta of macro imbalances, and ultimately, financial repression must be restored.”
However, not all analysts are convinced that gold’s run is sustainable.
Alex Kuptsikevich, senior market analyst at FxPro, noted that buying gold as a geopolitical safe haven has never proven sustainable. He said heightened geopolitical uncertainty is not reflected in either bond or equity markets.
“Gold is now rising against the tide. It is likely to run out of steam sooner rather than later. Gold is now close to the overbought territory, making it vulnerable to a reversal under pressure from fundamental factors such as high bond yields and a strengthening dollar,” Kuptsikevich said. “The Russia-Ukraine conflict caused a similar spike in the price that we already have, but then there were fears of a supply disruption from a major producer. Even then, the price fell well below where it started before the ‘war rally.'”
While investors will continue to keep an eye on geopolitical headlines next week, a busy economic docket could also create some volatility.
According to economists, their focus will come mid-week when the first print of U.S. third-quarter Gross Domestic Product will be released. Economists have noted that a resilient U.S. economy is a significant reason why bond yields have risen to a 16-year high.
Next week will end with essential inflation data, which could impact gold prices. Some analysts have said that while the U.S. may not fall into a recession, it could see some stagflation as lower growth is met with higher consumer prices.
Market attention will also be focused on the global central bank policies. The Bank of Canada and the European Central Bank will release monetary policy decisions next week. Economists will be watching to see how the central banks walk the line between slower growth and stubborn inflation.
Next week’s data:
Tuesday: U.S. flash PMI data
Wednesday: BoC monetary policy decision, new home sales
Thursday: ECB monetary policy decision, Q3 U.S. GDP, U.S. durable goods, pending home sales
Friday, Core PCE price index, personal income and spending