Gold: Price holds despite higher yields – Commerzbank

Commerzbank’s Carsten Fritsch notes that Gold remains around USD 4,400 per ounce even as US Treasury yields rise back toward late-July levels, decoupling from real interest rates. He suggests markets may doubt the Fed’s willingness or ability to hike sufficiently, or fear fiscal risks, both supportive for Gold, with ETF flows showing renewed investor interest after recent outflows.

Higher yields fail to derail Gold

"The gold price is holding at around USD 4,400 per troy ounce, thereby defying the rise in oil prices and US bond yields."

The yield on 10-year US Treasuries reached 4.74%, almost returning to the level seen at the end of July, whilst the yield on 30-year Treasuries exceeded 5.3% for the first time since 2007. As market-based inflation expectations have hardly changed since then, real interest rates have also returned to the level seen at the end of July. By way of comparison: at that time, gold was trading at USD 4,040, i.e. significantly lower."

"Although the interest rate expectations reflected in Fed Funds futures have risen marginally in recent days, they remain significantly lower than at the end of July. One interest rate hike is priced in by the end of the year. At the end of July, this figure was 13 basis points higher."

"The rise in yields is therefore not attributable to increased expectations of interest rate hikes, but appears to have other causes."

"It could be, for instance, that the market doubts the Fed will raise interest rates sufficiently to combat inflation effectively. Another possible explanation is fiscal risks – notably rising government debt – which are also likely to preclude a more substantial increase in key interest rates."

"Both of these explanations would clearly be positive for gold."