Gold has slid to roughly $4,260 an ounce, nearly 24% below its January peak, as a rate hike, surging Treasury yields and a stronger dollar tighten financial conditions. The metal's drop has been far smaller than the shift in real yields would suggest, leaving gold looking expensive against the return now available on inflation-protected Treasuries.
Gold trades around $4,260 an ounce, nearly 24% below its January peak of $5,594.82. That is a real correction, but the metal's latest slide still lags the scale of the shift in the macro backdrop it is supposedly reacting to.
Real yields drive the reassessment
The Federal Reserve raised its target range by 25 basis points last week to 3.75% to 4.00% and signaled further tightening may be required. The 10-year Treasury yield then jumped 13.9 basis points in a single session to 5.106%, its highest level since 2007. The 2-year yield reached 4.891% after trading as high as 4.947%.
The 10-year real yield reached 2.76% on September 23. It was 2.46% on September 9 — a 30 basis point move in roughly two weeks. Gold pays no coupon, so as real yields rise, the opportunity cost of holding it rises too. The Dollar Index stood around 101.1 on September 24, near a two-month high, adding further pressure since gold is priced globally in dollars.
Futures point to more hikes ahead
Futures pricing implies a 73.5% probability the Fed raises rates again to 4.00% to 4.25% at the October 28 meeting. By December 9, markets assign 55.5% probability to a 4.25% to 4.50% range — two hikes above today's level. September's flash US Composite PMI rose to 58.4, its strongest reading since July 2021, reinforcing that view. Fed Governor Michael Barr also said further increases would likely be required.
The gap between yields and gold's decline
On September 22, spot gold traded around $4,325.03. A day later, it fell 1.64% to $4,283.40 as the 10-year yield's jump also hit stocks. The S&P 500 fell 0.75% and the Nasdaq lost 1.13%. Yet at $4,260, gold's additional decline since September 22 is only about 1.5%, even as real yields, the dollar and hike odds all moved sharply in the same direction.
The Middle East conflict remains an obvious reason investors may continue paying a premium for gold as insurance. But that insurance now has a real cost: at a 2.76% real yield, an investor holding gold must believe price appreciation, currency protection or geopolitical insurance will compensate for giving up a significant positive real return from Treasuries instead.
Source: Investing.com
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