Gold takes a hit as US real yield turns positive for first time in two years; down over 1% in a week

International gold started the week on a positive note and closed near key $2000/oz level but lost momentum and is now set for its first negative weekly close in three weeks.

Gold has corrected over 3 per cent from the recent highs and is down about 1.5 per cent on the week.

Gold came under pressure as US real bond yield turned positive for the first time in over two years as Fed officials raised the prospect of faster rate hikes to get inflation under control.

The US 10-year bond yield moved closer to the key 3 per cent mark and tested the highest level since December 2018. Meanwhile, the US real 10-year bond yield ticked above zero on April 19 for the first time since March 2020.

A net positive real return from bonds will increase the opportunity cost of holding other assets — adding pressure on gold was some stability in equity markets.

US DJIA index jumped to the highest level since early February and is set to mark its first weekly rise in four weeks.

Equity markets gained some footing as market players assessed economic numbers and corporate earnings results to gauge if the economy is strong enough to deal with higher interest rates.

While only a few companies have released their results so far, some promising results helped ease market worries about slower growth. As per Bloomberg analysis, of the 87 S&P 500 companies that have posted results, about 80 per cent have beaten estimates.

Some positive economic numbers also showed signs of strength in the economy. New US home construction rose in March to the highest level since 2006 reflecting strength in the housing market.

Continuing jobless claims, which represent the number of people already receiving benefits, stood at the lowest level since 1970, reflecting a tighter labour market.

A pause in gold’s rally also caused investors to exit the metal. Gold holdings with SPDR ETF rose to Feb.2020 highs earlier this week but we saw some net outflows at fag end of the week as price struggled for direction.

While gold came off the highs, geopolitical risks, inflation concerns, and growth worries continued to support prices. The Russia-Ukraine war has now entered its ninth week and fighting has intensified in the eastern Ukrainian region.

Meanwhile, there are no efforts to hold fresh negotiations to resolve the issue. Adding to tensions, the UK has slapped Russia with more sanctions, targeting military leaders as well as goods like caviar and diamonds.

Russia has also announced a travel ban on several US business leaders, journalists, and officials. Market players are wary that European Union’s fresh sanctions could include restrictions on Russian energy exports.

Growth concerns rose this week as IMF, in its economic outlook, revised down the global growth forecast for 2022 citing the Russia-Ukraine war. IMF lowered its growth forecast from 4.4 per cent to 3.6 per cent.

IMF’s projection show that Russia and Ukraine economy may contract sharply this year while Europe may face most of the brunt for hostilities in the region.

IMF further rattled global markets by stating that the Ukraine war is pushing inflation higher globally and will last much longer than previously expected.

Gold’s sharp rise in the last few days and failure to break past $2,000/oz level made it vulnerable to profit-taking which was aided by stability in equity markets and a rise in bond yields.

The correction however shows nervousness ahead of the next major event which is Fed’s meeting in early May. Comments from Fed officials has already fueled expectations that Fed may raise the interest rate by 0.5 per cent at the upcoming meeting and this has been factored into some extent.

Market players are now trying to assess whether Fed may take further aggressive measures to get inflation under control. While nervousness ahead of Fed’s meeting may keep gold prices pressurized, we still expect gold to hold above the $1900/oz level until there is a major resolution to the Russia-Ukraine dispute.

(The author is Associate Vice President – Commodity Research at Kotak Securities)

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