2.5% bond yield shouldn't scare gold investors - WGC
(Kitco News) - Gold investors remain laser-focused on the bond market. The selloff and rising yields have been the biggest factor weighing on the precious metal since the start of the year; however, the World Gold Council said that investors don't have to worry about bond yields even if they push to 2.5%.
In a recent interview with Kitco News, Juan Carlos Artigas, director of investment research at the WGC, said that although gold has been lackluster through the first quarter of 2021, there is still a lot the global economy faces this year that will be supportive for the precious metal.
"The macroeconomic environment indicates is that 2021 still remains supportive for gold prices," he said.
Artigas added that it makes sense for bond yields to push higher as expectations grow that the global economy will see a strong recovery from the COVID-19 pandemic. However, he also said that with central banks, particularly the Federal Reserve, expecting to keep interest rates at the zero-bound range for the foreseeable future, he expects bond yields to eventually find a natural plateau.
"Yes, we have seen a substantial rise in yields so far this year, but historically they are still extremely low," he said. "Even if the 10-year goes to 2.5%, again, from a historical perspective, that is still very low."
Artigas' comments come as the yield on U.S. 10-year notes current trades near a more than one-year high above 1.6%. However, it does appear that the gold market is becoming more comfortable with the bond market selloff as prices remain well above $1,700 an ounce. June gold futures as of 10:48 a.m. ET, last traded at $1,733 an ounce, down 0.69% on the day.
Although bond yields can continue to move higher, Artigas said that a major unknown that could create the biggest tailwind for gold is inflation. He explained that if inflation starts to rise faster than nominal bond yields, then real yields will remain near their historic lows, which is a significant factor for precious metals.
"The full impact of the pandemic is still unknown," he said. "We don't know the unintended consequences from all the stimulus that has been pumped into the global economy. We expect that investors will continue to look to gold to hedge some of that risk.
Not only have governments worldwide pumped massive amounts of liquidity to support financial markets, including providing money directly to consumers, but Artigas noted that central banks have also signaled their willingness to let inflation run hot while the economy continues to recover.
He added that investors are facing a structural shift in the global economy and global central bank policy.
Looking at the current price action, Artigas said that the lackluster performance reflects shifting sentiment among tactical investors. These investors have been fleeing the gold market, which is indicated by the significant outflows in gold-backed exchange-traded funds through the first three months of the year.
According to data from the World Gold Council, North American and European gold ETFs saw outflows of nearly 200 tonnes in the first quarter. Gold holding dropped by about 10%, roughly in line with the price decline in the first quarter.
However, Artigas added that the lower price has allowed more strategic investors to enter the marketplace, providing more long-term support for the precious metal.
"As a strategic asset, gold doesn't have to provide you 25% gains every year," he said. "Generally, investment strategies are more robust when assets are not thought of in isolation, but as components in a broader portfolio."