Back
Details Cookies
United Kingdom
Important margin product information

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

Cookie policy

This website uses cookies to offer you a better browsing experience by enabling, optimising and analysing site operations, as well as to provide personalised ad content and allow you to connect to social media. By choosing “Accept all” you consent to the use of cookies and the related processing of personal data. Select “Manage consent” to manage your consent preferences. You can change your preferences or retract your consent at any time via the cookie policy page. Please view our cookie policy here and our privacy policy here

XAUUSD XAUUSD XAUUSD

Yield-curve control could be gold’s best friend

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Global markets, including gold, await tomorrow's FOMC meeting with some excitement. The reason being last week's upside break in longer dated bond yields following the stronger-than-expected US job report. This has led to renewed speculation about how ready the Fed is to implement yield-curve control (YCC). The introduction of a cap on longer dated yields could in our opinion be the trigger that lays the foundation for the next move up in gold prices.


What is our trading focus?

XAUUSD - Spot gold
XAGUSD - Spot silver
XAUXAG - Gold-Silver ratio
GLD:arcx - SPDR Gold Shares ETF
GDX:arcx - VanEck Gold Miners ETF

____________________________________________________________________________________________________

Global markets await tomorrow’s FOMC meeting with perhaps a bit more excitement than a meeting at this stage in the cycle would normally attract. The reason being last week’s upside break in longer dated bond yields following the stronger-than-expected US job report. This has led to renewed speculation about how ready the Fed is to implement yield-curve control (YCC).

A decision to introduce yield caps, on maturities out to five or perhaps even ten years, could be an important next step for risk assets, the Dollar and not least gold. Any hesitancy from the Fed tomorrow, on the other hand, could mean that risky assets have over-shot their potential for now and see a steep correction in risk assets in the near term and a back-up in the US dollar.

So far this week longer US treasury yields have backed down from the big move last week, likely as treasury traders are concerned about the message from the Fed, as any lack of clear intent to shift to an eventual yield-curve-control could see steepening set to continue. (alternatively, the yield curve could flatten if the markets feel that the Fed has grown uncomfortable with the markets’ current speculative frenzy).

From a gold perspective the reaction to a no-change would likely be mixed with the risk of rising yields and a weaker Japanese yen being off-set by potential weakness in stocks. On the other hand the introduction of a cap on longer dated yields could in our opinion be the trigger that lays the foundation for the next move up in gold prices.

Gold’s long established inverse correlation with US real yields is already well established as per the above chart. Some of the major moves in gold during the past decade often started with developments in the bond market. The real yield is the return an investor get on holding a bond position once the nominal yield has been reduced by the expected inflation during the life of the bond. Rising inflation expectations would normally increase the nominal yield as investors would want to be compensated for the lower real return.

Yield-curve control locks the nominal yield at a certain maturity at a certain level above which the central bank steps in and buy whatever bonds are on offer in order to prevent yields from rising any further. Such a development would make fixed income investments utter useless as a safe haven asset, especially into a period where inflation is expected to make a comeback. Not only due to the massive amount of liquidity that central banks have provided but also due to unprecedented government stimulus creating the political need for higher inflation to support rising debt levels.

For now gold remains anchored around $1700/oz with speculative binge buying of stocks reducing demand for safe haven and diversification. The market has already firmly shifted the focus away from the Covid-19 pandemic to a V-shaped economic recovery. This at a time where economic data continues to paint a different picture while the pandemic, despite improvements in some regions, is still not under control. The WHO in their latest update said new daily cases have exceeded 100,000 in nine out of the past ten days with a record 135,000 new cases having been reported on Sunday. The bulk of recent cases coming from 10 countries, mostly in Americas and South Asia.

In my latest gold update here and video interview with Kitco News here, both written and recorded before Friday’s US report, I highlighted our reasons for maintaining a bullish outlook for gold and with that also silver. The recent price action has also once again put on display gold’s ability to frustrate while highlighting the need to be patience.

Hedge funds have cut bullish futures bet to a one-year low and this group of traders will have to re-engage on the long side before seeing gold trade higher. Hence the increased focus on the FOMC and with that the potential reaction across other asset classes. From a technical perspective a break above $1800/oz would be the trigger needed to send gold towards a new record high, thereby joining the multiple records already seen in other currencies so far this year.

Source: Saxo Group

Disclaimer

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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.