Why gold is struggling near $4,300 as 5% yields test the safe haven trade

Gold prices edged higher on Friday but remained on course for a weekly decline, as a stronger dollar and a renewed surge in US Treasury yields tested investor appetite for the non-yielding metal.

Spot gold was up 0.2% at $4,288.36 an ounce by 0200 GMT, while US futures gained 0.6% to $4,323.10.

Bullion was still down about 2% for the week, putting the focus back on whether safe-haven demand can withstand a more hawkish Federal Reserve and borrowing costs above 5%.

The dollar index was heading for a roughly 1% weekly advance near 101.25, while the 10-year Treasury yield traded around 5.19% after touching 5.2251%, its highest in 19 years.

Rates regain control of the gold trade

Gold’s latest pullback reflects a familiar problem: higher yields raise the opportunity cost of holding an asset that pays no interest.

Philadelphia Fed President Anna Paulson said on Thursday that underlying inflation remained in a range of about 2.5% to 3% and had shown little progress towards the Fed’s 2% target.

She backed last week’s quarter-point rate increase and said modest further tightening could be warranted if the economy develops as expected.

That message has reinforced expectations that the Fed’s first rate increase in more than three years may not be a one-off move.

Futures markets were assigning a 71% probability to another increase next month, up from about 53% earlier in the week.

MUFG strategist Soojin Kim told Barron’s this week that gold is being pulled in opposite directions by geopolitical uncertainty, which supports haven demand, and restrictive US monetary policy, which reduces the appeal of bullion relative to yield-bearing assets.

Five percent yields raise the hurdle for $4,300

The immediate question is whether gold can reclaim and hold the $4,300 area after dropping to a weekly low around $4,244 on Thursday.

FXStreet analyst Dhwani Mehta said on Friday that bullion remained vulnerable while trading below important daily moving averages, even after recovering from Thursday’s low.

That leaves $4,300 as an important near-term test for buyers trying to stabilise the market after this week’s decline.

Oil is complicating the picture. Brent remained above $105 a barrel after a sharp overnight rise, keeping inflation concerns alive even as investors watched for possible progress towards reopening the Strait of Hormuz.

Structural demand has not disappeared

The weak period has not yet broken the broader investment case for gold.

World Gold Council data show global gold-backed ETFs attracted $18 billion in August, the second-largest monthly inflow on record.

Holdings climbed by 121 tonnes to a record 4,189 tonnes, while assets under management reached $615 billion.

Central banks also remained net buyers, adding 23 tonnes in July. China and Poland were among the largest reported buyers, according to the council.

That leaves gold caught between two powerful forces.

A stronger dollar and 5%-plus Treasury yields are raising the near-term cost of owning bullion, but geopolitical risk, sovereign-debt concerns and persistent institutional demand continue to support the longer-term case.

Silver slipped 0.1% to $63.81 an ounce, platinum rose 0.5% to $1,756.90 and palladium fell 1.3% to $1,257.56. All three were also headed for weekly declines.

The post Why gold is struggling near $4,300 as 5% yields test the safe haven trade appeared first on Invezz