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Will gold regain its luster, or do bond yields have a different say?

15 Mar 2021 04:00 PM

Gold prices rose in 2020 to their highest levels ever near $ 2,075 an ounce, in light of the spread of the new Coronavirus, and central banks around the world pumping huge amounts of money in an attempt to contain the repercussions of the pandemic on global economies, which have witnessed one of the worst economic crises.

Since last August, prices have decreased with the successive announcement of vaccines, and the markets are optimistic about the return of economic activity to normal, with the spread of vaccines on a large scale, and the recent decline in the number of new infections, which put more pressure on gold, to record its lowest level since last June at 1676 dollars.

During last week, the US House of Representatives passed a new stimulus package on Wednesday evening, amounting to $ 1.9 trillion, before US President Joe Biden signed the bill on Friday, the Senate passed the bill amid opposition from Republicans.

The yellow metal received the news positively, to rise from its lowest levels in nearly 10 months and is currently trading around $ 1730 an ounce.

With the high yield on bonds that we have witnessed recently and considering the positive results of most economic data in the United States in particular, we have witnessed a decline in demand for gold as a safe haven, as the yield on US 10-year bonds rose to 1.60%, its highest level in more than Almost a year ago.

Gold has decreased by about 14% so far since the beginning of 2021, after it recorded its best performance in 10 years during the past year, due to markets fears of the virus, low interest rates and unprecedented stimulus measures.

Gold is usually directed as a hedge against inflation and considering the cheap money available in the markets currently, expectations of inflation have risen in the coming period, but with high bond yields amid increasing optimism in the markets about the upcoming recovery, which led to an increase in the opportunity cost of owning gold. The recent rise in real interest rates was a sign of growing optimism about the economic recovery.

There is an inverse relationship between the trend of gold prices and bond yields, as bond yields rise, gold prices decline, and vice versa, and this is what the following chart shows:

Investors keep their wealth in several ways, one through currencies and the other through precious metals such as gold, but investing in gold does not generate any interest, and in fact storing physical gold is expensive, and the alternative here is to keep your money in low-risk bonds that give you interest, for example, so when high Bond yields that make investing in gold less attractive.

This is what we have witnessed during the recent period of the increase in the risk appetite of some investors and the trend for high-risk assets such as stocks, and some that went to low-risk assets such as US bonds, with the high market hopes for a strong economic recovery.

According to technical analysis, levels of $ 1740 an ounce remain at the present time a key factor for putting gold on the road to recovery to return again to levels of $ 1770, including the levels of 1800, which according to the studies department we see the beginning of the return of gold to the levels of 1900/1960 dollars that reached To it at the beginning of 2021, but the strong support level at $ 1670 will be pivotal to determine the fate of the yellow metal, as with breaking that level it will open the door to a strong decline that may push prices to 1600 or even $ 1560 per ounce.

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