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Standard Chartered: U.S. Treasury Yields To Be Key Driver For Gold

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(Kitco News) - Yields on U.S. Treasury notes (USTs) are likely to be the biggest influence on gold going forward, say analyst with Standard Chartered.

In the meantime, the precious metal could get a lift from political and geopolitical turmoil, but this type of a safe-haven bid tends to be temporary, the bank pointed out.

Spot gold on Tuesday hit its highest level of 2017, peaking just above $1,296 an ounce, before pulling back slightly on Wednesday. The Comex August futures stopped a couple of dollars shy of their high for the year. The most recent leg higher began in earnest on Friday when the government reported a lower-than-forecast gain in May nonfarm payrolls. Treasury yields have weakened since.

Higher yields tend to hurt gold since they can underpin the dollar, and gold has an inverse relationship to the U.S. currency. Also, higher yields mean a higher so-called “opportunity cost” – or lost interest income – from instead holding a non-yielding asset such as gold. Conversely, falling yields help gold.

“Real yields and safe-haven flows are the two key drivers for gold in the coming months,” Standard Chartered said.

U.S. 10-year yields traded as high as 2.239% on Thursday, the day ahead of the jobs report. They fell as far as 2.133% on Tuesday. Conversely, Comex August gold rose from a low of $1,263.70 on Thursday to a six-week high of $1,298.80 on Tuesday.

“We believe political uncertainty still has scope to spark additional interest in gold, but the key driver on the macro front will be USTs,” Standard said. “This is gold’s strongest relationship that has held up well this year. If 10-year UST yields return to 2.60%, gold could trade to $1,200/oz.  We expect prices to average USD 1,245/oz in 2017.”

U.S. Federal Reserve policymakers are expected to hike interest rates next week, and Standard noted that the last three U.S. hikes marked cycle lows for gold prices. Standard said it expects two more Fed rate hikes this year and then two more in 2018.

“Stronger-than-expected data and hawkish rhetoric are likely to present low points for gold, but prices have bounced back thereafter in the past,” the bank said.

Meanwhile, geopolitical uncertainty has triggered “substantial” safe-haven flows, sparking the current attempt at $1,300. However, geopolitical risks tend to stoke “temporary fillips in gold,” with other drivers needed to maintain momentum, Standard said.

Meanwhile, the bank described silver’s supply/demand picture as price-supportive. However, since speculative positioning has been driving the recent move higher, analysts also said that prices look “vulnerable to the downside in the near term amid profit taking.” They call for silver to average $17.70 an ounce this year.

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 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.
PDAC 2019