Gold Price Outlook Complicated by Rising Bond Yields and Equity Rout
Fundamental Forecast for Gold: Neutral
- Gold vulnerable to rising bond yields as the appeal of the precious metal fades
- The rout in US equities and other ‘risk-on’ investments may spur risk aversion
- Until markets come to terms with the changing landscape, the fundamental outlook for gold is uncertain
Gold Price Beholden to Fundamental Developments and Sentiment
Gold posted a modest rally this week, climbing from sub $1190 levels to enter into the weekend slightly above $1200. Despite the rally, the outlook for gold turned more uncertain than ever as rising bond yields and an equity rout jolted markets.
Gold Price Chart Hourly, October 1st- October 5th
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Typically, rising bond yields are a fundamentally bearish development for gold. The precious metal misses out on the benefit of rising rates and therefore as investors chase return, gold is cast aside. This results in a slip in demand and a subsequent drop in price. With the 10-year US treasury yield hitting 3.24%, the highest since 2011, it would suggest gold is headed lower. Unfortunately for gold speculators seeking clarity, rising yields were accompanied by an equity rout.
In the chart below, we can see a relatively high correlation between high grade bond yields and a decline in the price of gold.
Aggregate Government Bond Yields of the US, Germany, United Kingdom, and Japan overlaid with the Inverse Performance of Gold
Chart prepared by John Kicklighter
Although gold misses out on the benefits of rising yields, it does have allure as a traditional safe haven asset. With that in mind, the equity rout should spur demand for safe havens. Not only have US equities been pressured this week but emerging markets as well, suggesting demand for return might be slipping and risk aversion rising.
Dollar Basket Price Chart Hourly, October 1st – October 5th
Despite the rout in equities, robust demand for safe haven assets has not materialized. We can confirm this by looking at othertraditional safe havens like the Japanese Yen. Another safe haven, the US Dollar, also slipped entering into the weekend.
This leaves gold deadlocked between two the fundamental forces, rising yields and safe haven demand. With that in mind, this week’s fundamental forecast for gold is mixed. Until there is further clarification in the markets on the driving forces behind these fundamental developments, it would not be surprising to see gold trade sideways within its recent range.
Gold Price Chart Daily, February – Present
Looking briefly to technicals, gold could be expected to trade between the fib levels at $1213 and $1175. Tighter support resides at the trend line dating back to mid-August. Further, some short-term resistance has materialized around the $1207 level with multiple failed breakthrough attempts in the past month.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact Peter on Twitter at @PeterHanksFX
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