Bond Yields Below 3% Supporting Gold Prices - DailyFX
(Kitco News)- U.S. long-term bond yields unableto rise above 3% could be bullish for gold prices in the near term, accordingto one research firm.
Ilya Spivak, senior currencystrategist at DailyFX, said in a report Thursday that the gold market isattracting some bargain hunters after the bond market was able to absorb recordissuances of $26 billion in 10-year notes Wednesday.
Spivak noted that thebid-to-cover ratio came in at 2.55, which was down from the previous ratio of2.57, an indication that investor demand for government debt has picked up. The bond sale drew a yield of2.96%, in line with where the new security was trading just minutesbefore the auction.
“Investors seemed to interpretthe outcome to mean that the oncoming flood of new issuance needed to financethe widening budget deficit will find healthy take-up. That sent U.S. debtprices higher, trimming baseline borrowing costs,” said Spivak.
While elevated, the yield on U.S.10-year bonds remain below critical support at 3%; meanwhile, gold prices haveseen modest gains for the last three sessions. However, prices remain at thebottom end of their trading range, hovering above the recent 12-month low. ComexDecember gold futures last traded at $1,221.50 an ounce, up relatively flat onthe day.
Historically, gold has had a highnegative correlation to bond yields. Rising bond yields and interest ratesweigh on gold as its opportunity costs increase as a non-yielding asset.However, the relationship has broken down in recent months as bond yields haveheld relatively unchanged but gold prices have dropped 10%.
Not only are fundamental factorssupporting gold prices, but Spivak said that technical momentum indicatorssuggest a market bounce in the near term.
“A break above range floorsupport-turned-resistance at $1,221.25 opens the door for a test of the $1,236.60-40.86area,” he said.
For many commodity analysts,$1,236 is a critical area of resistance that gold needs to push above to signala break of its four-month downtrend. While there is still a record level ofnegative sentiment in the marketplace, some analysts see potential for goldprices to push higher in the near term.
Looking ahead, many commodity analysts areoptimistic that gold prices can rally heading into year-end in part because ofgrowing concerns over the governments increasing debt, which could weigh on theU.S. dollar.
By Kitco NewsFor Kitco News
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