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Debbie Carlson

Gold Traders Should Keep An Eye On Bond Yields

By Debbie Carlson of Kitco News
Friday, May 16, 2014 2:17 PM

(Kitco News) - Gold traders may keep an eye on U.S. bond yields after the 10-year Treasury note dipped to its lowest level in seven months this week.

June gold futures fell Friday, settling at $1,293.40 an ounce on the Comex division of the New York Mercantile Exchange, up 0.45% on the week. May silver fell Friday, settling at $19.329 an ounce, up 1.09% on the week. 

Although next week is a full trading week, activity may start to slow by week’s end as traders gear up for the Memorial Day weekend, the unofficial start of summer in the U.S. Markets and government offices are closed on May 26.

In the Kitco News Gold Survey, out of 33 participants, 25 responded this week. Of those, 11 see prices trading sideways or are neutral, while eight see prices down and six see prices higher. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Financial markets were taken a little bit by surprise this week when U.S. 10-year Treasury yields fell to 2.5%, the lowest in seven months, despite an uptick in wholesale and retail inflation. Bond prices, which move inversely from yields, have been firmer than expected this year.

“This year's bond rally refuses to die,” said Alex Manzara, vice president at R.J. O’Brien & Associates, in the Eurodollar market. “I don't think I have ever seen as many people confounded by such a strong move....  My personal view is that the move to lower rates has a variety of factors including the slowdown in China/Asia, the continued deflationary quagmire in Europe, the fact that low rates favor capital over labor, thus holding down wages, etc.”

Analysts at Deutsche Bank said the drop in U.S. real yields “introduces a more supportive environment for the gold price since gold and silver returns (tend) to perform well in an environment where U.S. short- and long-term real yields are falling.”

One gold trader said he’s keeping an eye on the bond market and said it’s possible if bond yields stay put, it could give gold a boost. “It gives you a sense that something is afoot and making people nervous. They go to U.S. paper (bond market) as the market of last resort,” he said. “We’ll see if this Treasury rally will help gold break out on the upside.”

But that doesn’t mean he’s expecting it to happen, he said. For next week, he said he is still forecasting gold to stay in the current range between $1,280 and $1,305, saying that the $1,305 area is a “great place to trade from” on the bearish side.

While bond yields are falling, Deutsche Bank analysts also pointed the U.S. dollar is strengthening, which may explain why gold has been range-bound since a stronger dollar and weaker yields are inconsistent. And this inconsistency is one reason they caution gold bulls from putting too much stock in the Treasury price rally.  

“Given our macro forecasts, we view the decline in U.S. real yields as unsustainable while U.S. dollar strength will be sustained. This would tend to suggest that if and when a break-out in the gold price occurs, it will be to the downside,” they said.

Bart Melek, vice president and head of commodity strategy, rates and foreign exchange research at TD Securities, also pointed out that the U.S. 10-year Treasury rate is far under levels implied by the Federal Funds futures contract or the interest-rate hike expectations.

That suggests “the current Treasury rally may have not been fundamental and may be of a temporary nature. As such, a series of strong US macro numbers could well send rates higher and gold down through support near $1,280 an ounce,” Melek said.

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Gold traders may also look toward India, as early election votes from the country suggest that the Bharatiya Janata Party, which is thought to be pro-business, may have enough votes to have a simple majority. The Indian stock market rallied on the news. There are some hopes that perhaps the BJP will relax some of the duties on gold imports last year and thus revive some physical demand for the yellow metal. Overall, physical demand has been extremely lackluster in part because of the sideways trade in gold, bullion dealers said.

Yet newsletter editor Dennis Gartman suggested that the election results may not be gold-friendly after all. He said the election is more bullish for the rupee. “It is perhaps bullish (rupees) even still after the recent sharp rally of Indian stocks, but a rising stock market is usually anathema to gold prices”

Next week is a light data week, with no major economic reports out until Thursday. That will likely leave Wednesday’s scheduled release of the April Federal Open Market Committee meeting minutes as primary focus for traders. Analysts at Nomura said the meeting minutes may include some details of an April 29 meeting to discuss medium-term monetary policy issues.

 “Based on previous discussions of this nature, we expect that the minutes will reveal some details of this discussion. We believe that the most likely topic discussed was the evolution of short-term funding markets over the last five years and the developments in the Federal Reserve’s operating procedures that will be necessary before the FOMC actually seeks to raise short-term interest rates,” they said.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter at @dcarlsonkitco


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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