Gold Holds Ground Amid Rising U.S. Bond Yields

With U.S. Treasury yields reaching 16-year highs, gold has managed to hold its ground despite the enormous headwinds it continues facing. High interest rates mean assets like bonds typically gain value, increasing the opportunity costs of investing in gold.

Interest rates have now hit the highest levels in the last 40 years, meaning gold has a lot of competition to face. Despite this healthy competition, the precious metal has still managed to maintain prices above critical $1,900-per-ounce levels. Gold futures increased earlier this week by 0.3%, proving the asset’s ability to hold strong, even with rising U.S. bond yields.

After numerous consecutive losses, spot gold achieved its best day in over two weeks on Monday, signifying that it may be on the rise again. Traders are looking forward to the upcoming central bank policymaker meeting this coming Friday for further cues on how long interest rates will stay high. Any dovish take during the meeting would bode well for gold.

The recent spike in yields on ten-year Treasury notes came from the increased expectation over the Federal Reserve maintaining high interest rates to combat inflation. After July’s FOMC meeting minutes came out, the marketplace realized how strictly the committee plans on achieving the goal of 2% inflation. With inflation well above this target, interest rates may need to stay high for quite some time.

Due to this re-shaped expectation, Treasury yields reached the highest price point since 2007, when the Great Recession began. How long yields will stay high will ultimately depend on this week’s Symposium.

If the Fed’s outlook on interest rates maintains a firm stance, yields may stay high. If committee members reveal more dovish takes, yields will likely drop, allowing gold to rise. Given the latest CPI data showing cooling inflation rates, the Federal Reserve should have a slightly different stance now when compared to July’s meeting.

In other news, pay expectations from American workers increased in July, according to a survey conducted by the New York Federal Reserve. Despite workers understanding the tight job market, they’re expecting higher pay to meet the climbing inflation rates.

The survey revealed that workers now expect an offer for an annual salary of at least $67,416. One year ago, participants reported an expectation of an average $60,310 average annual salary offer for a new job. “The increase was broad-based across age, education, and income groups, but was most pronounced for respondents above age 45 and college graduates,” the report explained.

Survey participants claimed that the odds of them moving to a new employer sat at around 10.6% this year. Last year the figure was a bit higher, at 11%. The figure may be lower this year because respondents also claimed that they have a lower chance this year of receiving a job offer within the next four months compared to this time last year.

The lowest wage that survey respondents claimed they’d accept a job offer for also increased from $78,645 compared to last year’s $72,873. Workers are expecting wages that they aren’t getting. This year’s average wage offer in July for survey respondents was $69,475.

The high worker expectations show that inflation may be cooling, though it’s nowhere near over. People are still feeling its effects every day. The Federal Reserve may feel strongly about calming inflation rates, though the committee does not want to negatively affect the already tight labor market.

“The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” July’s FOMC meeting minutes stated.

In overseas news, the global stocks rally came to an end as energy prices surged and looming fears over China’s economy took over investors’ minds after numerous gains in equity markets. Despite these fears, physical gold demand remains high in China, providing critical support to the precious metal’s pricing.

The next big impact on gold prices will likely be the 2023 Economic Policy Symposium, “Structural Shifts in the Global Economy,” taking place from August 24 to 26. During this event, traders can gather key insights into central bankers’ opinions regarding future interest rates. The meeting should provide clarity on what we can expect from September’s Federal Reserve gathering.

How the meeting will play out is still up in the air, though we do know that its impact will likely only affect gold prices in the short term. In the long run, analysts are predicting strong performance gains from gold by mid-year 2024. As always, investors should consult their financial advisors for portfolio support.

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