U.S. bond yields fall, gold prices continue to strengthen

Since mid-to-late July, gold, which has been volatile for more than four months, has finally begun to rebound strongly. A number of industry insiders said that the signal of the Fed's marginal loosening of monetary policy is the main reason for this round of gold's rebound. With the addition of geo-risk aversion and other factors, gold has been blessed with short-term funds, but it is still volatile in the short term.

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Gold prices rose for a fourth straight week, helped by falling U.S. Treasury yields, as investors assessed recent U.S. inflation data; there is some short-covering in the gold market, supported by a pullback in Treasury yields. U.S. Treasury yields slipped after a volatile week as investors assessed whether a marked slowdown in inflation would slow the pace of the Federal Reserve’s rate hikes. Market participants lowered expectations for aggressive rate hikes by the Fed after data earlier this week showed U.S. inflation had cooled, and recent comments from Fed officials remained hawkish and prevented gold from breaching the $1,800 level. Gold, a non-yielding asset, tends to perform well in a low interest rate environment.

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TD Securities commodity strategist Bart Melek said inflation remains a significant issue, and it is likely that inflation will continue to exceed the Fed's preference. The lower-than-expected US CPI reading was mainly driven by lower energy prices, but inflationary pressures could return once the weather turns cold. The Fed is unlikely to comfortably lean toward lowering rates in early 2023, as many had expected. For gold, this means there is still a significant risk of a pullback to $1,700.

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Gold tends to fluctuate in the short-term. For the grasp of the core macro variables in the future, if the 10-year U.S. bond interest rate and the 3-month U.S. bond interest rate are inverted, it will further strengthen the inversion signal of the term spread, and the end of the interest rate hike cycle will be gradual; non-farm employment in the United States Once the data on the number of people and the unemployment rate deteriorates, it will substantially confirm the signal of a recession in the US economy. If the downward trend of the US CPI data is confirmed, inflation will ease, and the necessity of raising interest rates to curb inflation will weaken. If these signals appear, it will indicate that the overseas macro cycle will change from a "stagflation" period to a "recession" period, thus continuing to strengthen the allocation logic of gold.

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St. Louis Fed President Bullard, Chicago Fed President Evans and Minneapolis Fed Presidents also support the view of further rate hikes, a hawkish outlook that keeps U.S. Treasury yields high near multi-week lows, which will Continue to act as a boost to the dollar and further resistance to the unyielding gold. On top of that, risk sentiment has further dented demand for safe-haven assets, weighing on gold.

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Gold has been hovering around the key $1,800 level and markets have trimmed rate hike expectations, which also weakened the dollar, although most Fed speeches continued to suggest more rate hikes. The gold market has already priced in most of the rate hike expectations, and it is the divergence in future expectations that is driving the trade.

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Lithuanians have started hoarding gold bars and coins due to the unstable situation in the region, said Linas Veikalas, director of the Lithuanian Mint. There are very few gold products left in the only mint store in the Baltic states, just a few gilded angels, coins and bars. Compared with last year, gold sales in 2022 have increased several times, especially after the outbreak of the Russian-Ukrainian conflict. “Since time immemorial, gold has always appreciated in value when a crisis hit, as opposed to securities or bonds. Gold is more of a crisis investment vehicle. Looking at the whole situation, looking at inflation today, we would expect the price of gold will rise, which will automatically lead to increased demand for gold,”