(Kitco News) - Thin holiday trading could highlight a bigger, more positive picture for the gold market as the precious metal continues to hold its ground even as bond yields push higher.
As U.S. markets opened following Christmas, the 10-year bond yield rose above 4.6%, hitting its highest level since May. At the same time, the U.S. dollar remains elevated above 108 points.
However, despite these two significant headwinds, the gold market has been able to hold its ground. Spot gold last traded at $2,633.80 an ounce, and is up 0.60% on the day.
Some analysts have warned investors not to look for trends during this holiday season as liquidity is extremely low; some key markets, like London, are still closed as part of the Christmas holiday.
Other analysts note that the broken negative correlation between bond yields and gold could be a key theme for investors in 2025. The gold market is traditionally sensitive to higher bond yields as it raises the precious metal’s opportunity costs as a non-yield-bearing asset. According to some analysts, 10-year bond yields continue to react to expectations that higher inflation will force the Federal Reserve to limit its monetary policy measures next year.
Last week, the central bank signaled at its final monetary policy meeting of 2024 that it expects to cut rates only two times next year. Ahead of the meeting, markets were looking for four rate cuts.
In a recent interview with Kitco News, Tom Bruce, Macro Investment Strategist at Tanglewood Total Wealth Management, said that he sees 10-year yields at the low end of their range and thinks it could easily push above 5% in 2025.
Bruce is not alone in his hawkish outlook on bond yields. Wells Fargo sees the 10-year yield hitting 5% in the new year.
While a resilient economy and stubborn inflation support higher bond yields, some analysts note that the U.S. government’s massive debt could also be driving yields higher. Analysts have noted that this is a positive for gold.
Fixed income analysts at Bank of America are expecting to see higher yields in the U.S. as the supply of bonds increases in 2025.
“One of the key questions for the UST market next year is the balance between supply and demand. Alongside the Republican sweep, deficits are expected to climb at a more aggressive pace starting in FY '26. We anticipate the US Treasury to begin growing coupon supply once again in the second half of '25 to prepare for larger spending needs,” the analysts said in their 2025 outlook report. “On the demand side, we are optimistic for a still supportive buyer base, but building fiscal concerns and upside inflation risk could complicate this backdrop. However, risks remain that this balance worsens if investors become more skeptical about 'buying the dip,' a concern with potential inflation resurgence if the Fed puts hikes back on the table.”
Along with rising government debt, some analysts note that gold investors don’t have to fear higher yields as there is another dynamic in the marketplace.
Commodity analysts note that central bank gold purchases have completely transformed the marketplace, shifting the supply and demand fundamentals. Most analysts expect that central banks will continue to diversify away from the U.S. dollar and into gold, which will reduce the impact the greenback’s fluctuations will have on the precious metal.
According to some estimates, analysts are looking for central bank gold demand to remain above the five-year average of 500 tonnes in 2025.
