Bond Yields Below 3% Supporting Gold Prices - DailyFX
Ilya Spivak, senior currency strategist at DailyFX, said in a report Thursday that the gold market is attracting some bargain hunters after the bond market was able to absorb record issuances of $26 billion in 10-year notes Wednesday.
Spivak noted that the bid-to-cover ratio came in at 2.55, which was down from the previous ratio of 2.57, an indication that investor demand for government debt has picked up. The bond sale drew a yield of 2.96%, in line with where the new security was trading just minutes before the auction.
“Investors seemed to interpret the outcome to mean that the oncoming flood of new issuance needed to finance the widening budget deficit will find healthy take-up. That sent U.S. debt prices higher, trimming baseline borrowing costs,” said Spivak.
While elevated, the yield on U.S. 10-year bonds remain below critical support at 3%; meanwhile, gold prices have seen modest gains for the last three sessions. However, prices remain at the bottom end of their trading range, hovering above the recent 12-month low. Comex December gold futures last traded at $1,221.50 an ounce, up relatively flat on the day.
Historically, gold has had a high negative correlation to bond yields. Rising bond yields and interest rates weigh on gold as its opportunity costs increase as a non-yielding asset. However, the relationship has broken down in recent months as bond yields have held relatively unchanged but gold prices have dropped 10%.
Not only are fundamental factors supporting gold prices, but Spivak said that technical momentum indicators suggest a market bounce in the near term.
“A break above range floor support-turned-resistance at $1,221.25 opens the door for a test of the $1,236.60-40.86 area,” he said.
For many commodity analysts, $1,236 is a critical area of resistance that gold needs to push above to signal a break of its four-month downtrend. While there is still a record level of negative sentiment in the marketplace, some analysts see potential for gold prices to push higher in the near term.
Looking ahead, many commodity analysts are optimistic that gold prices can rally heading into year-end in part because of growing concerns over the governments increasing debt, which could weigh on the U.S. dollar.