Expectations of further interest rate rises are affecting the price of gold. This week, US ten-year yields rose to over 3.4%, reaching their highest levels since June, whereas gold moved in the opposite direction, falling from its high of USD 1,800 per ounce in March to under USD 1,670 – its lowest level since April 2020.
Investors have steadily reduced their gold holdings in recent weeks.
The latest Commodity Futures Trading Commission (CFTC) data show that speculators’ net long positions on the gold futures market have fallen sharply in the last few months and ETFs have been reducing their gold inventories. Investors have been voting with their feet and reducing their gold positions, because the combination of high short-term interest rates and lower inflation expectations has reduced gold’s appeal. The options market is also reflecting this new dynamic – three-month risk-reversals, which measure the cost of a gold put compared with a gold call, have fallen consistently in recent weeks – meaning that investors are becoming less bullish on the gold outlook.
Markets believe that US inflation dynamics will soon peak in the current cycle and forward-looking indications are consistent with this stance. Freight and shipping rates have fallen, suggesting that supply-chain tensions have eased somewhat. Oil prices have also dipped, due to perceptions of stalling economic growth. As a consequence of these developments, real interest rates have risen, meaning the opportunity cost of holding gold has risen. Meanwhile, short-term interest rates have continued to increase, while inflation expectations are starting to ebb, explaining gold’s decline in recent weeks.
Coming into the fourth quarter, there is the possibility of further drawdowns for the yellow metal.
Assuming that the Fed proceeds to hike rates at its current pace, this will lead investors to reduce risk across the board. A move to levels of around USD 1,650 per ounce is possible, but we think that any substantial downside below this level is unlikely to be sustained.