(Kitco News) – Gold and silver are managing to hold key near-term support levels ahead of the weekend, and while the precious metals remain stuck in relatively neutral territory, some analysts have said that the volatility in bond markets this past week could be a sign of shifting fears in the marketplace.
Although long-term bonds are looking to end the week down from their recent highs, they remain in critically elevated territory. The yield on 30-year U.S. Treasuries is holding above 5%, and the yield on 10-year notes is ending the week above 4.5%.
Analysts note that, in the short term, higher bond yields represent significant headwinds for gold and silver. Rising bond yields could force the Federal Reserve to raise interest rates by the end of the year, which, in turn, would raise the opportunity cost of holding non-yielding assets like gold and silver.
However, analysts also note that there is a fine line between higher bond yields caused by rising inflation and a potential bond crisis that would support precious metals as a wealth preservation tool.
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said that the risk of a bond crisis is rising, but the storm hasn’t hit yet.
“We are getting close to that point, but we are not fully there yet. The key risk is the long end of the curve becoming untethered. If 10-year and 30-year yields keep rising in a disorderly way, markets may begin to question whether government bonds still offer the same safe-haven protection,” he said. “The signal to watch is simple: if long yields rise but gold stops falling, that means investors are no longer seeing higher yields as a reason to avoid gold — they are seeing them as a reason to own it. That is when renewed wealth-preservation demand can come back strongly.”
John Murillo, Chief Business Officer at international brokerage firm B2BROKER Group, said that he is also watching for a potential bond crisis; however, he added that for gold investors, the environment will probably get worse before it gets better.
“Although gold is still respected as an anti-inflationary and anti-geopolitical-stress hedge, it faces an increasing headwind from increasingly vocal fixed-income narratives betting on incumbent Fed Chair Kevin Warsh’s more hawkish stance than his predecessor’s. At the end of the day, gold may face a short-term correction, as geopolitical tensions and a slowdown in central bank purchases are weighing on investor sentiment,” he said. “Nevertheless, the ongoing quiet rollover of many central bank reserves from sovereign bonds to precious metals effectively sets a firm floor against any significant bearish speculation.”
Near term, Murillo said that there is a risk that gold prices could drop to $4,000 an ounce, but in the long term, he sees potential for prices to hit $10,000.
“This view is not unique but is based on growing concern about ‘sticky’ inflation caused by the long-term consequences and high impact of the Middle East conflict, reinforced by the U.S. dollar’s weakening momentum,” he said.
However, not all analysts are convinced that a bond crisis is looming on the horizon. Fixed-income strategists at TD Securities said that the rise in the long end of the yield curve is in line with rising inflation expectations.
“Based on our decomposition, the repricing of Fed expectations has been the primary driver of higher rates. However, rising inflation expectations and still-solid growth momentum have contributed to the upward pressure,” the analysts said in a note. “We don’t believe the move higher in rates is currently being driven by renewed worries about U.S. deficits or a lack of foreign demand. While we don’t believe the Fed wants to hike rates, markets could continue to price in more hikes, risking a further drift higher in near-term Treasury yields.”
Commodity analysts at TD Securities said that, in this environment, there is a risk that gold prices could test support around $4,350 an ounce.
David Morrison, Senior Market Analyst at Trade Nation, said that he expects gold prices could struggle as markets start to aggressively price in rate hikes.
“The CME’s FedWatch Tool now indicates that there’s a greater probability of a 25-basis-point rate hike before year-end (42%) than of rates being kept on hold (30%). Meanwhile, the likelihood of 50 basis points’ worth of hikes this year has risen to 22% from zero a month ago. That looks likely to put downward pressure on gold prices,” he said. “As far as the costs of the war are concerned, very few investors have expressed much concern about federal debt or growing deficits. It’s something that consistently fails to gain much traction, even as debt held by the public is now over 100% of GDP. Maybe this time will be different.”
In what has become a familiar theme in the marketplace, with a relatively light week of economic data, markets will continue to pay attention to headline risks surrounding the war in Iran. Holidays in Europe, the U.K., and the U.S. mean trading activity at the start of the week will be extremely light.
Following Friday’s disappointing finalized University of Michigan Consumer Sentiment numbers, investors will be paying close attention to the U.S. Conference Board Consumer Confidence Survey.
The University of Michigan said its Consumer Sentiment survey fell to a fresh record low of 44.8. At the same time, one-year inflation expectations rose to 4.8%.
Later in the week, markets will receive the second print of first-quarter Gross Domestic Product (GDP) data. However, analysts note that markets will be more interested in April inflation data with the simultaneous release of the monthly Personal Consumption Expenditures (PCE) Index.
Gold prices could be sensitive to a further rise in inflation pressures.
Economic data to watch next week:
Monday: US, European, UK Markets closed for holidays
Tuesday: US Consumer Sentiment
Thursday: US Preliminary Q1 GDP, US PCE, US weekly jobless claims, US Durable Goods Orders, US New Home Sales
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