Why the gold price is a ‘slave to the US bond market’
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The ASX has opened the week in uncertain territory, as markets navigate the pandemic reemergence trade.
It follows a cautious session on Wall Street, after employment data showed the US economy only added around 180,000 jobs in September — well short of the 500,000 expected.
It was a jobs print that sent mixed messages, as the labour supply (people looking for work) fell which meant the unemployment rate also declined.
In response, there was a notable move in gold on Friday night.
The precious metal briefly ripped above US$1,780 an ounce, its highest level in weeks, before an equally sharp decline to recent tradings level below US$1,760.
Weighing up the price action, Pepperstone analyst Chris Weston said it demonstrates that the gold price is “a slave to the bond market”.
In a nutshell; when real yields (nominal yields less inflation) go down, gold goes up (and vice versa).
That price action played out in real time on Friday night. Nominal yields on benchmark 10-year US treasuries have been steadily climbing in recent weeks, as post-COVID inflation expectations edge higher.
When the jobs print missed, 10-year yields initially fell. In turn, gold prices shot higher.
By the end of session, traders had changed their mind. The conclusion was that some seasonal factors were at play, while US wage growth is still climbing.
US 10-year yields are now back above 1.6% for the first time since June. In that context, it’s no surprise that gold “once again has its sights set on the bond market”, Weston said.
Here’s where the technical charts are setting up for the next move in gold.
If nominal US bond yields climb slower than inflation expectations (and real rates fall), gold “should close and break above US$1,780/oz”, Weston said.
“However, if bond markets sell-off and nominal rates outpace inflation expectations, then gold will chew through bids seen between US$1,755 to US$1,744,” he said.
That in turn would set up a move toward gold’s September 29 lows of US$1,721.
The mixed session for US stocks on Friday indicates global stocks are lacking a catalyst in either direction.
The extension to the US debt ceiling (good) was offset against weaker jobs data, and Weston again said the s-word (stagflation) is in play.
Stagflation is a sub-optimal economic backdrop where upward pressure on prices continues, even while growth slows.
Such a scenario is “being slowly priced through markets”, Weston said.
“Bond yields are rising, interest rates are being increasingly priced in, and energy is finding buyers easy to come by on weakness.”
In that environment, investors should be keeping a hawkeye on US company updates this week as Q3 earnings season gets into full swing.
The major banks are on deck this week, starting with JP Morgan on Friday night (along with investment giant Blackrock and Delta Airlines).
Morgan Stanley and Wells Fargo are up on Thursday night, followed by Goldman Sachs on Friday.
These CEO updates will give investors an important glimpse into how the dominant post-COVID narratives are playing out at the coalface — particularly the increased attention on supply chain disruptions.
Weston said he’s currently neutral on the S&P500, and is looking for a sustained move above 4,463 to consolidate the next move higher.