Gold’s surge driven by global bond yield collapse

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.

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.