Head of Commodity Strategy
Summary: Gold continues its impressive performance this month amid demand from investors seeking a haven against weakness in stocks and bonds as well as geopolitical turmoil in the Middle East. We believe that the continued surge in US bond yields has traders and investors growing increasingly concerned about US fiscal policy, and especially whether the recent jump in both real and nominal yields will break ‘something’, hence the current situation where rising bond yields supports gold
Gold continues its impressive performance this month amid demand from investors seeking a haven against weakness in stocks and bonds as well as geopolitical turmoil in the Middle East. In the process we have seen normal correlations breaking down with gold managing a strong rally despite surging US Treasury yields and a strong dollar. So far this month, the yellow metal has rallied around 8% when the yield on US 10-year Treasury Notes surged 40 basis points to near 5%, a level that was last touched in 2007 while the dollar trades up 1% against its major peers.
The US earnings season so far has offered a mixed to slightly positive outlook, but with tech heavy stocks being such a big part the major indices have nevertheless been selling off with the market recalibrating technology valuations amid rising real yields. Rising interest rates also hurt green transformation stocks with Saxo’s “Green transformation” theme basket trading down 24% on the month as the capital-intensive sector suffers from rising interest rates cutting ROI on new green projects.
Gold has now fully recovered from the recent selloff to challenge $2k, a big psychological level, as the 180-dollar rally from the October 6 low at $1810 has forced a major response from speculators who in early October held the biggest net short in COMEX gold futures since November. While geopolitical tensions following the October 7 attacks inside Israel were the trigger, buying pressure from funds forced to flip positions back to a net long added to the strong momentum. In the week to October 17 wrongfooted speculators bought 5.7 million ounces of gold – fourth biggest in the last decade – to reverse the mentioned ill-timed short back to a 4.2 million ounce net long, still well below the 14.8 million ounce long reached during the US banking crisis earlier this year.
It is also worth noting that total holdings in bullion-backed ETFs have yet to show any signs of long-term investors getting back in. Total holdings have been falling continuously for many months with asset managers, many of which trade gold through ETF’s, continue to focus on US economic strength, rising bond yields and potentially another delay in peak rates as reasons for not getting involved. These together with the rising cost of funding a non-interest paying precious metal position has been a significant driver behind the year-long reduction in gold positions, and in recent updates we have argued that this trend would likely continued until we see a clear trend towards lower rates and/or an upside break forcing a response from real money allocators for ‘fear of missing out’.
This Thursday, gold is once again close to challenging $2000/oz while seeing fresh dollar strength and rising Treasury yields offering no headwinds, and with safe haven and short covering no longer the main drivers, something else aside from strong bullish momentum has emerged to support prices. We believe that the continued surge in US bond yields has traders and investors growing increasingly concerned about US fiscal policy, and especially whether the recent jump in both real and nominal yields will break ‘something’, hence the current situation where rising bond yields supports gold.
In the short term, the market will be watching Middle East developments as well as Friday’s PCE deflator data, the FOMC’ preferred inflation indicator. Next week, could be a nervous one for the bond traders, not only do they have to navigate the November 2 FOMC meeting, but more importantly the quarterly refunding announcement on November 1 when the US Treasury Department spells out its near-term plans for supply of 3-year notes, 10-year notes, and 30-year bonds.
Gold trades within a very steep ascending channel which highlights not only the current strength of the rally but also the need for consolidation. Earlier this week the yellow metal did correct lower only to find support at the first given opportunity just above $1950. A close above $2000 may signal a move towards the two record closing highs around $2050 from March 2022 and May this year.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
