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(Kitco News) - When it comes to investor demand, the gold market is in a pretty deep funk. But we can’t be that surprised by this turn of events. Why would someone hold gold when opportunity costs are rising, and they can get a 5% yield in short-term money markets?
Growing expectations that the U.S. economy will see a soft landing means that investors could see practically risk-free returns with short-term T-bills.
However, before we write gold off as entirely irrelevant, let’s not forget that there is still one segment of the marketplace that continues to pile in; investors should pay close attention.
After record purchases in the first half of 2023, data shows that central banks continue to buy gold, with China dominating the marketplace. Data shows that the People Bank of China bought 23 tonnes of gold last month and has bought more than 100 tonnes so far this year. This past week the World Gold Council also noted that Turkey, Poland and the Czech Republic also increased their gold reserves in July.
While demand may be down from record levels seen last year, central banks continue to buy gold because their faith in the U.S. dollar continues to weaken.
This week, Kitco News talked with Willem Middelkoop, creator of the Commodity Discovery Fund, who said that he expects central bank gold demand to continue to support gold prices and drive them higher through year-end.
"When you buy gold, it's a direct vote against the U.S. dollar," said Middelkoop. "China is sending a message to the White House that they don't support the global financial system backed by the U.S. dollar."
While the U.S. economy isn’t expected to collapse anytime soon, analysts and economists are warning investors that cracks are starting to appear. You just have to look at the bond market as yields remain near 15-year highs.
Thursday, the U.S. Treasury Department auctioned off 30-year bonds, which sold for a yield of 4.189%, its highest level since 2011. However, even that wasn’t enough to attract investors as the amount allotted to primary dealers rose to its highest level since February. The auction showed clear weakness for longer-dated U.S. debt.
Of course, the disappointing auction results are not a major surprise as the auction comes a week after Fitch Ratings downgraded U.S. long-term debt.
After Thursday’s disappointing auction, investors will be paying close attention to the bond market, which could be good for gold even if yields continue to rise.
The government faces some difficult challenges as its deficit rises in a higher interest rate environment. This week the Congressional Budget Office (CBO) estimated that the federal budget deficit reached $1.6 trillion in the 10-month period ending in July. The U.S. deficit has more than doubled this year, the report said.
Some investors are now starting to ask the question: are we close to a tipping point?
If the U.S. government can’t attract investors to buy its debt, the bond market could become unruly, which is the last thing the Federal Reserve wants. This scenario would force the Fed to come in and be the buyer of last resort.
Gold becomes a very attractive safe-haven asset if investors lose faith in U.S. bonds.
Of course, a U.S. bond crisis will not happen overnight, but analysts have noted that sentiment can shift fairly quickly. This means holding gold won’t be important… until it really is.
That’s it for this week. Have a great weekend
