Gold and silver continue to exhibit troubling behavior; stabilizing on falling yields, only to slump when they rise a bit. This week was no exception with gold struggling both before, and especially after, Wednesday’s FOMC meeting where Fed chair Jerome Powell delivered a surprisingly hawkish press conference, saying the Fed was ready to commence tapering from November while bringing forward the first rate hike to late 2022. The biggest drop came on Thursday when, as mentioned, the Bank of England managed to wrong-foot the market by signaling its first rate hike well ahead of the US, potentially already in February.
US ten-year yields broke higher through a key level of resistance at 1.4% while the corresponding real yield jumped 10 basis points to reach a three-month high at –0.89%. Gold is not only a metal which tends to respond to movements in the dollar and yields, both of which has been price negative for most of the year. It is also used by fund managers as a hedge or diversifier against risks across financial assets, but with financial assets and market valuations near all-time highs, this demand has faded and become a recent source of selling.
In other words, if you as an investor believes the current market confidence to be misplaced, the cost of buying insurance against it continues to get cheaper with gold presently trading near the lower end of its year-long range. Over the coming weeks we will watch yield developments closely with rising yields potentially raising renewed uncertainty across other asset classes, such as interest rate-sensitive growth stocks. Also, the continued surge in the cost of most energy sources will ultimately support our non-transitory views on inflation. For now, however, gold needs a solid break back above $1835, and until that happens, which we still believe it will, there are no major reasons to chase or add to any existing positions.