Higher yields impacting gold; any relief in sight? Peter Hug
(Kitco News) - The 10-year yield has climbed to 1.56% Friday morning, but can rise to as high as 1.7% before the Federal Reserve steps in to intervene, said Peter Hug, global trading director of Kitco Metals.
"At 1.5%, 1.6%, [the 10-year yield] is basically where it was just pre-COVID. It look like we're going to start opening the economy in certain states. If it gets north of 1.75%, I think [Fed Chair Jerome Powell] is going to change his tune. He may create something within the Fed's toolbox to cap those rates," Hug said. "The last thing he needs right now is the 30-year to be north of 2%."
The relationship between nominal yields and commodities is tied by the U.S. dollar, Hug explained.
"What affects the movement in commodities is really the value of the dollar because commodities are priced in dollar terms. So if you have yields rising in the U.S. but not rising in Europe or the Far East, then the yield differentials between the two currencies create capital movements in the foreign exchange markets, which is a market that is 20 times the size of the metals markets," he said.
Hug noted that the U.S. dollar will still see weakness despite higher domestic yields relative to foreign yields, as monetary stimulus is going to create additional interest expense pressures for the U.S. government.