Gold Rallies Amid Banking Stress and Yield Decline
Key Takeaways
- Gold rallies by $150/toz recently
- Largest US 2-year yield decline since 1987
- The rapid decline signals risk of market exit
- Rates volatility reaches 2008 crisis levels
Gold has rallied by over $150/toz over the past two weeks on the back of banking stress and lit up by US 2-year yields recording the largest decline since 1987, which triggered a significant risk appetite reversal.
After a lengthy inversion, a rapid decline in front-end yields, in this case of a magnitude 10 variety, is typically a get-of-dodge signal for risk markets.
Fed Shift Ignites Market Volatility
The speed at which markets repriced a Fed pivot from 100bp tightening to 50bp in rate cuts by year-end has been unprecedented, leading to a spike in rates volatility to levels last seen in the depth of the 2008 financial crisis.
During the sell-off, gold outperformed risk assets such as equities or credit, turning it into an effective hedge in the risk-off rotation.
Volatility Impacts Commodities and Gold Amid Fear
Cyclical commodities like oil and base metals fell sharply, mainly on a liquidity shock as opposed to any change in underlying micro fundamentals that have, if anything, strengthened due to the improving China backdrop. Hence, rate volatility is tremendously impacting oil market sentiment these days.
Financially, this VaR shock started in rates as SVB’s collapse forced a rethink on the path of the Fed Funds Rate and pretty much everything else. If your central bank call is wrong, you will most assuredly get everything else wrong.
But ultimately, Fear is the essential medium to short-term driver for gold.
