Gold Headed to August 1 Low as 10-Year Yields Moves Toward 2.06 Percent

Gold is still trading well above its August 1 low, but with Treasury yields headed toward their August 1 high of 2.06 percent, a move into this level could trigger another steep drop in gold to at least $1412.10.
James Hyerczyk
Gold Bars and Dollar

That big “pop” we heard in the markets on Thursday was not the sound of champagne corks popping amid reports that China and the U.S. have agreed to cancel additional tariffs that were imposed during their trade war, but rather the sound of the yield on the benchmark 10-year Treasury note jumping the most since President Donald Trump’s election.

On Thursday the 10-year yield jumped 115 basis points to 1.96%, the biggest jump since the 20-basis-point move the day after Trump was elected in 2016. The move also brought the yield to its highest level since August. The yield curve, which inverted over the summer, raising recession fears, also steepened to the widest since January.

If you recall, there was a dramatic slide in the 10-year Treasury yield over the summer which pushed long-term yields below rates on short-term debt. This raised flags about a potential recession because history has shown that this rare market phenomenon is a pretty reliable warning signal, according to economists.

Since the summertime inversion and recession fears, bond yields have rebounded, driven by a combination of better-than-expected corporate profits, the end of the Federal Reserve’s “mid-cycle” cuts and improvement in U.S.-China trade relations.

Yesterday, investors dumped Treasury bonds and bought stocks amid positive news over U.S.-China trade relations. Given the lack of new economic information on Thursday, the move in the bond market may have been a sign that investors have officially switched off their recession alarm and are now looking to the potential for stronger growth.

Impact on Gold

The jump in yields is having the biggest impact on gold prices, which are poised to post their biggest weekly drop since May 2017.

On August 1, December Comex gold hit a low of $1412.10 and by August 26 was trading at a high of $1565.00. Since then is has essentially remained rangebound, mostly holding above 50% of this range at $1489.20. However, a sustained move under this level will indicate that sellers are regaining control.

The 10-year yield is also at its highest level since August 1, the day that Trump tweeted he could put new tariffs on China, a negative event for markets. It was also the day after the Fed cut interest rates by a quarter point, its first of three cuts.

The Fed signaled last week that it was pausing its rate cuts, and yesterday, China and the U.S. agreed to rollback tariffs. So it stands to reason that if the fundamental events that drove yields lower and gold higher are being erased, the markets should at least return to their August 1 levels.

Gold is still trading well above its August 1 low, but with Treasury yields headed toward their August 1 high of 2.06 percent, a move into this level could trigger another steep drop in gold to at least $1412.10.

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