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Yields on 10-year U.S. Treasury Notes drop as well as gold

Commentaries & Views

It is a well-known fact that gold prices are extremely sensitive to the rise or fall of 10-year Treasury yields. The higher the yield in the 10-year note (interest paid to the purchaser) has an inverse correlation to the price of gold. That means as yields rise in the U.S. debt instruments, it pressures gold to lower pricing. Inversely as yields drop in U.S. debt instruments it tends to create bullish undertones for gold pricing.

Today market participants witnessed the exact opposite with 10-year Treasury yields moving to a 10-year low, and gold prices also trading lower on the day. The 10-year note traded to a low of 1.179% the lowest yield in the last five years. The 10-year note closed at 1.193%, and gold futures recovered off of today’s intraday low of $1795.

What is most perplexing is that gold futures traded under tremendous pressure when the yield on the 10-year note fell to a low of 1.179%. However, it was dollar strength that accounted for all of today’s decline in gold futures. The U.S. dollar index is currently trading up 15 points, which is a net gain of +0.17%. When compared to today’s fractional decline in gold pricing which is currently -0.09%, it is clear that market participants were bidding the precious yellow metal higher and it was not all dollar strength that accounted for today’s decline.

Equities globally as well as the United States did all trade under pressure today with the Dow Jones industrial average losing -2.09%, the NASDAQ composite giving up -1.06%, and lastly the S&P 500 losing -1.59% in trading today.

Analysts across multiple platforms are attributing the decline in global equities to the uptick in infection rates of the Delta variant. Typically, this would also move US debt instruments higher as they have in other countries. So, the fact that we witnessed yields decline in the United States is a bit perplexing.

As reported by MarketWatch, “Gang Hu, a managing partner and TIPS trader at WinShore Capital Partners, says the once-popular reflation trade is already giving way to an entirely different trade as investors begin to factor in both slower-than-expected U.S. growth, along with the prospects of a prolonged period of higher inflation readings. What he calls “the tapering trade”—in which investors sell stocks and commodities while buying long-end Treasuries — has the potential to drive the 10-year rate to as low as 1% within the next two months, he says.”

As of 5:21 PM EST gold futures basis, the most active August 2021 Comex contract is currently fixed at $1813.30, which is a net decline of -$1.70 when compared to Friday’s close. However, when compared to today’s open of $1811.60 gold futures gained a couple of dollars from the opening price.

On a technical basis, the low that came in today was within four dollars of the 100-day moving average which is currently fixed at $1791.

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Wishing you, as always, good trading and good health,

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