After plummeting at the beginning of the week, gold futures are trading flat on Tuesday while silver continues to decline. Higher crude oil prices and rising US treasury yield have skewed the outlook for the precious metals, with market participants expecting the US Federal Reserve to raise interest rates again.
Gold rate today: Global market outlook
In the international market, COMEX gold futures were flat at $4,168 per ounce while silver futures dropped more than a percent to $61 per ounce. On the Multi Commodiy Exchange of India, the most traded December gold futures was flat at Rs 148,600 per 10 grams and the December silver futures was at Rs 225,500 per kg, down 0.9%.
Gold prices plunged more than 3% on Monday and silver prices crashed over 5%. “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,” Ole Hansen, head of commodity strategy at Saxo Bank, said in a report.
US yield continues to surge higher
Hansen says the pressure from rate 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. Traditionally, such a sharp increase in the opportunity cost of holding a non-yielding asset would be a major headwind for gold,” Hansen said.
“Funding stress could, however, become a short-term headwind. 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 added.
If these pressures intensify, rising margin calls, refinancing stress and broader liquidity requirements could force investors to raise cash, and gold’s highly liquid market makes it an obvious source of liquidity in such conditions. “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,” Hansen said.
Gold ETFs
Hansen highlighted an important divergence in his report. Internationally, Gold ETF holdings have continued to recover despite the rise in real yields. He says focus will remain on ETF flows, especially from investors who appear less sensitive to interest rates and more worries about the financial consequences of persistently high borrowing costs.
Global gold ETFs recorded net inflows of $134.2 million last week, according to data from the World Gold Council. Overall inflows were at $1.73 billion while outflows were at $1.59 billion. European investors poured into gold ETFs last week while North American investors withdrew.