(Kitco News) – Gold’s resilience is being severely tested as a break below $4,230, surging Treasury yields, and a stronger dollar have triggered renewed selling, with ETF demand now the only key counterweight, according to Ole Hansen, head of commodity strategy at Saxo Bank.
In his latest precious metals analysis, Hansen said that Gold’s early-week price action suggests the yellow metal is facing an increasingly severe test of its ability to sustain investment demand in the face of sky-high bond yields.
“The weakness reflects a combination of surging bond yields, a stronger dollar and technical selling following the support break, potentially amplified by profit taking from Chinese investors ahead of the Golden Week holiday,” he wrote. “The pressure from rates is becoming increasingly difficult to ignore. US 10-year real yields have climbed to an 18-year high near 2.85%, while short-term interest-rate markets are now pricing another three 25-basis-point Fed hikes by next April.”
Hansen noted that historically, sharp increases in the opportunity cost of holding a non-yielding asset like gold would constitute a major headwind.
“Yet the chart highlights an important divergence: gold ETF holdings have continued to recover despite the relentless rise in real yields,” he said. “The key question is whether this demand can persist. Focus will therefore remain on ETF flows, particularly from investors who appear less sensitive to interest rates and more concerned about the financial consequences of persistently high borrowing costs.”
He pointed out that while higher yields hurt gold through its traditional valuation channel, they also increase fiscal strain and debt-servicing costs, which could strengthen longer-term demand for gold as protection against financial and sovereign risk.
“Funding stress could, however, become a short-term headwind,” Hansen said. “Signs of stress are emerging at the weaker end of US corporate credit as higher rates increase refinancing risks. Triple-C spreads have widened sharply, while the gap to B-rated debt has reached levels previously associated with major economic slowdowns. More broadly, the spread between high-yield US corporate bonds and US Treasuries widened another 12 basis points on Friday to 294 basis points, the highest since April.”
Hansen warned that if these pressures intensify, investors may look to their most liquid available assets to raise the cash to cover margin calls and other liquidity requirements. “Gold’s deep and highly liquid market makes it an obvious source of liquidity in such circumstances,” he said. “This creates an important short-term paradox: the financial and fiscal strains created by higher yields may strengthen gold’s longer-term investment case, while an acute liquidity squeeze could initially trigger selling and weigh on prices.
“For now, the sharp rise in real yields and [Monday’s] technical breakdown suggest that gold's resilience is undergoing its toughest test yet.”
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