Gold faces challenges amidst the backdrop of rising real yields

Ole Hansen

Head of Commodity Strategy

Summary:  Gold continues to struggle, and by now the drift lower from the early May record high has seen it reach the lowest level in more than three months. Driven by US economic data strength supporting the hawkish stance laid out by the FOMC at their June meeting. Hikes that support the markets current belief the FOMC will be succesful bringing inflation under control, a situation that is driving inflation adjusted yields higher, thereby reducing the appeal of non-interest paying gold

Today's Saxo Market Call podcast
Global Market Quick Take: Europe

Key points in this gold update:

  • Gold struggles and have reached a three-month low to trade near key support
  • Market challenges conventional wisdom about yield curve inversion and recession
  • Short-term demand for gold suffers but overall bullish outlook remains


Gold continues to struggle, and by now the drift lower from the early May record high has seen it reach the lowest level in more than three months. Driven by US economic data strength supporting the hawkish stance laid out by the FOMC at their June 14 meeting when members talked about the need for more rate hikes before year end. Data strength which at the same time is challenging conventional wisdom that a steeply inverted yield curve leads to a recession, and together with the market still pricing inflation below 2.5% within the next two years it has driven up inflation adjusted yields, especially at the front end of the curve, thereby reducing the appeal of non-interest paying gold.

On three earlier occasions during the past two decades at peak in US Fed funds rate supported a strong gold rally in the months and quarters that followed, but with the timing of such a peak being postponed, short-term demand for “paper” gold through ETFs and futures have suffered. Our table showing some of the biggest and most popular commodity ETFs highlights the recent exodus from gold. Total holdings in bullion-backed ETFs have seen a 42 tons reduction during the past month to 2888 tons, leaving it just 33 tons above a three-year low that was reached just before the March banking crisis triggered strong demand for havens, especially gold.

For now, the direction of gold continues to be dictated by movements in the dollar (as seen below) and developments in the short-term interest rate market where traders place bets on the direction of Fed Funds rates and those bets are currently pricing in one full 25 bps rate hike by November before the attention turns to rate cuts with the first now priced in for March next year. As such, it is not a forecast that should trigger the kind of negative response currently seen in gold, and it highlights the fact the market fear more hikes have yet to be priced in. Especially if inflation does not fall at a pace acceptable by the FOMC.

While the short-term technical outlook may deteriorate further on a break below $1900, the next key US economic print will be Friday’s PCE (Personal Consumption Expenditure) deflator, the Fed’s preferred inflation measure. The headline is expected to show a price-supportive drop to 3.8% from 4.4% last month, but with core inflation expected to show continued stickiness at an unchanged 4.7%.

While the short-term outlook remains challenged by the Fed’s prolonged battle with inflation, we keep an overall bullish outlook for gold, driven among others by the following expectations:

  • Renewed dollar weakness as yield differentials continue to narrow.
  • An eventual peak in Fed rates have historically provided some strong tailwind to gold in the months and quarters that follow
  • Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation.
  • We believe inflation is going to be much stickier with market expectations for a drop back below 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.
  • A multipolar world raising the geopolitical temperature
  • Low investor participation, recently reduced further, adding support should the above-mentioned drivers eventually supply the expected breakout.

From a technical perspective, gold stays in short-term downtrend following the break below earlier support around $1934. Next key area to watch is around $1900 with $1903 being the 0.618 retracement of the March to May 258 dollar rally while $1902 represents the 0.382 retracement of the whole move up from the November triple bottom low. For the technical outlook to deteriorate further, thereby raising doubt about our overall bullish outlook, the price needs to break back below the February low at $1805. A close above the 21-day moving average, currently at $1945 would be the sign of a change towards a more price favourable sentiment.

Source: Saxo


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38

Contact Saxo

Select region


All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.