Yields at a 24-year high: why precious metals haven’t collapsed

By the usual rules, this should be a terrible market for precious metals. US Treasury yields are near their highest level since 2002, and the Federal Reserve is still raising rates. Yet silver rebounded to near $60.50 midweek, FXStreet reported, and gold finished the week with a 1.5% gain. Three forces are pulling on the metals at once, and they do not all point the same way.

Force one: a Fed that isn’t finished

Minutes from the Fed’s September meeting, released last week, showed unanimous support among all 19 policymakers for the September rate hike and a clear majority of officials in favour of another hike before the end of the year, according to FXStreet. Market pricing agrees: FXStreet put the implied chance of a hike by December at 78%, and ad-hoc-news.de, citing Reuters, at 82% after Friday’s data. Higher policy rates raise the return on cash and bonds, which raises the cost of holding metals that pay nothing.

Force two: bond yields at 2002 levels

Long-term yields are set by more than the Fed. They also carry the market’s view of inflation and of how much governments will need to borrow. With yields near their highest since 2002, the bond market is demanding the most compensation for lending to the US government in a generation. In isolation that is bad for gold and silver. But part of why yields are high — worry about government debt — is also a reason some investors want to hold gold, a link the World Gold Council has tentatively drawn in the UK, which we cover in Gold as a hedge against government debt.

Force three: Iran, Hormuz and oil

FXStreet also reported that oil prices rose on reports that the Trump administration had directed the Pentagon to prepare strike options against Iran. Any conflict involving Iran puts the Strait of Hormuz in focus — the narrow channel through which roughly a fifth of the world’s oil supply passes. Oil feeds inflation, which feeds rate expectations, so an oil shock works against metals through the rates channel. At the same time, geopolitical fear is the oldest reason people buy gold at all.

The tug of war

Put together, the forces explain the market’s choppy behaviour. Rates and yields push precious metals down; safe-haven demand, fiscal worries and the investment flows behind them push up. Friday’s rebound came when two of the three eased at once — oil softened and long-dated yields slipped, according to ad-hoc-news.de — which shows how sensitive the balance is.

That is also why this week’s US inflation data matters. We set out what is on the calendar in Can gold rally while the Fed is still hiking?, and the silver levels traders are watching in Silver at $60. Background on each force is in our guide to what moves the gold price.

Every figure here is as reported by the publications listed under Sources, at the time they reported it. Prices move; the live gold price has the current one. Nothing on this page is investment advice.