Gold prices have faced a second consecutive weekly loss as 10-year bond yields surged past 4.8%. This decline in COMEX Gold prices began in late September and has been primarily driven by the significant increase in US bond yields, fueled by strong economic data. Gold is now hovering near its lowest levels in seven months, influenced by the Federal Reserve’s hawkish stance, which suggests that monetary policy will remain tight for an extended period.
The yield on 10-year treasury notes recently reached a 16-year high of 4.88%, reflecting the robustness of the US economy in the face of higher borrowing costs. This situation has led to speculation that the Fed might need to maintain higher interest rates for an extended duration. Additionally, the passage of a last-minute spending bill by the Senate has contributed to increased bond supply, further driving up bond yields due to the rising US deficit.
On the economic data front, the US ISM Manufacturing PMI for September showed an improvement, rising to 49 from 47.6 in August, indicating the slowest contraction in the US manufacturing sector in ten months. Meanwhile, ISM Services growth remained strong.
The labor report presented a robust picture, with job growth reaching an 8-month high of 336,000 in September, well above market expectations. Wage growth remained steady and below forecasts, while the unemployment rate remained unchanged at 3.8%. Weekly jobless claims also stayed close to a seven-month low, suggesting that the labor market continues to operate at historically tight levels. These factors underscore the resilience of the US economy to rate hikes and support the Fed’s stance of maintaining higher rates for an extended period.
The signs indicating that the Fed will keep its policy tight for an extended period have pushed the yields on the 10-year Treasury Inflation-Protected Securities (TIPS), which serve as a proxy for real yields, to 2.4%, the highest level since 2008. Consequently, holdings at the SPDR Gold ETF have plummeted to a fresh four-year low, reaching 865.85 tonnes as of October 6, compared to 873.64 tonnes the previous week. However, a report from the World Gold Council (WGC) highlights that the long-term trend of healthy central bank demand for gold remains intact.
In August, central banks increased their gold reserves for the third consecutive month, adding 77 tonnes to global official reserves, marking a 38% increase compared to July’s buying.
Despite the short-term challenges posed by the higher interest rate environment, gold continues to serve as a valuable insurance against mounting financial risks, particularly as rates have risen rapidly. The current yields are substantially higher than they were in March, which triggered a regional banking crisis in the US. The upcoming US CPI data will be closely watched in the coming week, as it may provide further insights into the duration of higher interest rates.
In terms of price action, COMEX Gold has found support near the November 2022 lows at $1825 per troy ounce and showed signs of recovery by the end of the week, forming a bullish candle on the daily chart. It is now anticipated that the $1825-$1820 per troy ounce zone will act as a support level. As long as this support holds, there is potential for short covering to drive prices up to $1880 per troy ounce. However, if the bears manage to push the price below $1820 per troy ounce on a closing basis, it could pose a significant threat to breach the psychological level of $1800 per troy ounce.
(The author is Vice President-Head Commodity Research at Kotak Securities Ltd)
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