Yields Jump, Gold Falls Ahead of Record 10-Year Treasury Supply

Dollar-denominated commodities and emerging Asian currencies continued to weaken against a resurgent U.S. Dollar on Wednesday. After being favored for its safe-haven appeal earlier in the year, the greenback has struggled this year as the U.S. Federal Reserve pumped billions of additional dollars into the financial system and COVID-19 cases surged.

That trend has reversed somewhat in the past week and a jump in U.S. Treasury yields overnight, ahead of a record $38 billion bond auction later on Wednesday, gave the currency another boost across the board.

At 05:51 GMT, September U.S. Dollar Index futures are trading 93.850, up 0.250 or +0.27%.

Gold Falls Below $1900 as US Dollar, Yields Rise

Did the U.S. and China suddenly resolve their differences? Did the Coronavirus go away? No, then why is gold going down? It’s because investors who bought and analysts who recommended buying gold because of its safe-haven appeal during times of geopolitical turmoil are getting smoked. It’s because they don’t seem to understand that gold prices are controlled by interest rates.

At 05:59 GMT, December Comex gold futures are at $1892.10, down $54.20 or -2.78%.

Gold is an investment and it’s going to keep going down until it reaches a value area that is attractive enough to bring in the buyers. Of course, it’s going to need some help from Treasury yields, and right now rising yields are controlling the show.

It does help when a market gets a little too pricey, the Commitment of Traders gets a little too overbought, analysts say things like gold won’t rally below $2000 because of tensions between the U.S. and China, and major investment firms make predictions like $3000 or $4000 gold prices.

Those are headlines…don’t trade gold using headlines. Use Treasury yields as your guide.

Treasury Yields Up, Dollar Up, Gold Down

A jump in U.S. Treasury yields helped the dollar extend its winning streak, making gold more expensive for those holding other currencies. Higher yields also increase the opportunity cost of holding non-yielding gold.

U.S. Treasury yields jumped to one-month highs on Tuesday, a day before the Treasury will sell its largest-ever amount of 10-year notes, even as stocks reversed earlier gains that had them on track for record highs.

The Treasury last week increased auction sizes across the curve and said it plans to continue to shift more of its funding to longer-dated debt in coming quarters as it finances measures to offset the impact of the coronavirus pandemic.

It will sell a record $38 billion in 10-year notes on Wednesday and $26 billion in 30-year bonds on Thursday.

Any time you get a huge amount of supply, especially long-dated securities there is probably a reaction to sell the Treasury market before the debt comes. This drives up yields, making the dollar a more attractive asset and gold a less-desirable investment.

That being said, gold could start to climb again when the excitement from the auctions settles. Hopefully, by then it will have reached a value area.