Gold prices can push higher as bond yields have peaked - Metals Focus
One research firm said that they remain bullish on gold prices through 2021 as they expect the March highs in the U.S. 10-year yield above 1.7% to be the high-water mark for the rest of the year.
U.S. 10-year bond yields last traded at 1.58%, down 10% from last month's peak. Meanwhile, gold prices have moved to within striking stance of $1,800 an ounce. June gold futures last traded at $1,793, up nearly 1% on the day.
In a report published Wednesday, analysts at Metals Focus noted that rising bond yields since the start of the year have weighed on gold's opportunity costs as a non-yielding asset; the analyst added that U.S. bond yields pushed to a 15-month high due to improving economic growth expectations as a result of the vaccine rollout and the U.S. government's unprecedented stimulus measures.
However, they noted that the trend appears to be shifting back into gold's favor. The analysts noted that March's high above 1.7% has priced in a lot of good news for the economy and short positioning in the bond market was at an extreme level.
"To provide some context, non-commercial positions on the U.S. 10Y futures switched to net shorts during Q1.21 after remaining net long for three consecutive quarters. Importantly, at their peak, these net short positions climbed to the highest since Q4.19," the analysts said.
The research firm also noted that the sharp rise in U.S. bond yields had attracted a lot of foreign buyers who are seeing significantly lower domestic yields.
"Data suggests that Japanese funds invested nearly 1.7 trillion yen ($15.6 billion) in overseas fixed-income assets in the week ending 10th April, the highest since November 2020. If flows remain positive for the rest of this month, it could achieve the largest monthly total since June 2005," the analysts said.
Although improving economic data in the U.S. will continue to weigh on the bond market, supporting the rally in yields, Metals Focus said that they see limited impact going forward.
"Europe continues to lag behind the U.S. The recovery in the global economy is therefore likely to be uneven in the coming months, and so some of early optimism from investors could dissipate," the analysts said. "Worries about the sustainability of the global economic recovery mean that bond yields are unlikely to surpass their March peak very easily. More importantly, even if nominal U.S. yields further down the curve inch higher, we expect that most of that upside will be absorbed' by rising inflation expectations, leaving real yields negative for some time to come."
Not only is the bond market expected to have a weaker impact on gold prices through the rest of 2021, but Metals Focus said that rising debt levels and record valuations in equity markets will continue to support gold's safe-haven appeal.