Gold’s surge driven by global bond yield collapse Gold’s surge driven by global bond yield collapse Gold’s surge driven by global bond yield collapse

Gold’s surge driven by global bond yield collapse

Ole Hansen

Head of Commodity Strategy

Summary:  Gold’s rally to a six-year high remains mostly a bond story and for investors it is critical to keep an eye on the events, such as trade developments and central bank actions, that drive yields in order to determine what happens next.


Gold has been putting in a very strong performance during the past couple of months. Support has been provided by the race to the bottom in global yields and central banks switching back to easing mode. After rallying by close to 19% this year and 8% this quarter alone the price has reached levels last seen in April 2013. The GDX ETF which tracks major gold mining companies have rallied by 37% YTD and 13.5% this quarter.

The drop in global bond yields has resulted in close to $16 trillion worth of global bonds, especially from Europe and Japan, now yielding less than zero. This development combined with worries that global stocks may struggle amid slowing global growth and a prolonged US-China trade war has created a very friendly investment environment for gold. Current developments in Hong Kong together with the safe-haven bid for Japanese Yen have also been playing a part.

The below chart shows the increased investor appetite for “paper” gold through futures (hedge funds) and Exchange-traded Funds (ETF).  Hedge funds have accumulated a near record amount of exposure through COMEX gold futures during the past few months while total ETF holdings have witnessed a steady increase to the current level of 77.4 million ounces, a six-year high.

For investors in gold these developments represent one of the few clouds on the current horizon as previous spikes in speculative involvement have triggered a subsequent correction. What makes it different this time is the falling opportunity cost due to low yielding bonds and the increased risk of a recession.

The correlation between US 10-year real yields and gold – shown below - is another way off highlighting the diminishing opportunity cost of holding non-yielding gold versus bonds.

Having reached $1485/oz, the target mentioned in our Q3 Outlook gold has continued to move higher with the next target from a long-term technical perspective being $1587/oz, the 61.8% retracement of the 2011 to 2015 sell-off. The market is clearly in need of consolidation so any reversal in bonds and/or dollar strength may increase the temptation to book some profit. Just like $1380/oz was the support following the July breakout the next support level to focus on now is $1485/oz as per the chat below. A break below that level is likely signal a period of consolidation but at this stage not a reversal.

Source: Saxo Bank

In this Bloomberg Opinion piece from today the author highlights how negative yields are a painfully obvious sign that governments have room to take on more debt to improve infrastructure and fight climate change. If realized – keep an eye on Germany - such a development, which was mentioned by Steen Jacobsen in our Q3 Outlook, could trigger some inflationary pressures and with that create the foundation for even higher gold prices.

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

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. Registered in England & Wales.

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.

©   since 1992