The last time bond yields were this negative gold price was at $2,000 – Credit Suisse
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(Kitco News) - The gold market can only ignore falling bond yields for so long. It could be only a matter of time before gold prices turn back towards $1,900 an ounce and its all-time highs from last year, according to Credit Suisse.
Gold prices have struggled to hold support around $1,800 an ounce as the precious metal is seeing little benefit from new lows in real interest rates. Tuesday real yields in 10-year notes fell to -1.12%.
Commodity analysts at Credit Suisse noted that real yields are lower than levels observed last year when gold prices were trading around $2,000 an ounce.
"The lower real rate is being driven by increased demand for inflation-linked Treasury bonds amid concerns on the delta variant's impact on U.S. economic growth," the analysts said. "It appears that gold prices have decoupled somewhat from the TIPS yield in recent weeks, but we do not expect this to last, suggesting near-term upside for gold. We continue to forecast gold prices ending 2021 at $2,000/oz."
Given the current market conditions, including the U.S dollar index trading below 100 points, the analysts at Credit Suisse said that gold's fair value is currently around $1,914 an ounce, representing roughly a 6% increase from current prices.
The Swiss bank said that the key to renewed gold demand would be the Federal Reserves' monetary policy statement. Analysts have noted that any talk of the central bank reducing its monthly bond purchase program could end up pushing gold prices lower; however, a dovish tilt to the monetary policy statement and comments from Federal Reserve Chair Powell during the press conference could lift gold prices off of support at $1,800 an ounce.
Analysts at Credit Suisse said that the monetary policy risks lie to the dovish side.
"We anticipate continued accommodative policy for some time," the analysts said.
While falling bond yields remain an important driver for gold prices, Credit Suisse added that the precious metal remains an attractive portfolio diversifier against extreme global leverage and the growing popularity of cryptocurrencies.
Although gold's price action has been relatively lackluster recently, Credit Suisse noted that it is still generating significant value for the mining sector. The bank reiterated that its top picks in the mining sector are: Agnico Eagle, Barrick, Endeavour Mining, Kinross, Newmont, and Yamana Gold.