Higher Bond Yields Won’t Dim Gold’s Luster – Analysts

By Neils Christensen of Kitco News
Monday October 17, 2016 16:14

(Kitco News) - Higher global bond yields might not be a major hurdle for the gold market as analysts say there are other factors that still make the yellow metal attractive.

Bond markets are grabbing investors’ attention Monday as yields in U.S. 10-year note rose overnight to its highest level since early-June; at the same time, German and U.K. 10-year bonds hit their highest levels since late-June. Despite being off their recent highs, yields are still relatively elevated with 10-year bonds trading around 1.76%. Meanwhile, U.K gilts had a yield of 1.15%, its highest level since the Brexit referendum. Finally, German Bund managed to jump back into positive territory with its yield at 0.073%.

This jump in yields was not enough to hurt gold with the metal managing to hold key support above $1,250 an ounce on Monday.  December gold futures settled the day at $1,256.60 an ounce, up 0.09% on the day.

Barry Potekin of RMB Group, said that contrary to historical norms, he could see gold move up in step with bond yields. He added that opportunity costs aren’t the only thing that investors should be paying attention to in this current market environment.

“We are overdue for a major stock market correction and potential recession,” he said. “I don’t think you want to get rid of your gold right now.”

Potekin said that he could see bond yields moving higher, adding that he currently likes to short bonds and going long gold.

Axel Merk, president & CIO of Merk Investments, said that he also likes gold, noting that although bond yields have jumped recently, the market, along with equities, are still highly overvalued.

“If these yields continue to move higher, it could compete with gold but I wouldn’t bet on it. I think it all comes down to whether you think gold is a compelling portfolio diversifier or not,” he said.

Merk explained that investors need to pay attention to why bond yields are going up. He added that he doesn’t see this as a new trend in the marketplace given that governments and central banks are expected to continue expanding balance sheets and remain behind the inflation curve.
If central banks remain behind the inflation curve, Merk noted that real rates will still be low or even negative even if bond yields continue to go up.

“If you think that we are going to have a tough Fed that is going to really tighten rates then that will be bad for gold, but I just don’t see it. They can’t be aggressive because they don’t want risk premia to blow up in their face,” he said.

Looking specifically at the U.K. market, which since the Brexit vote has been a source of strong physical demand for the gold market, Simona Gambarini, commodity economist at Capital Economics said that she doesn’t think this demand is going to stop as a result of higher bond yields.

“U.K. domestic demand is being driven by safe-haven demand,” she said. “Investors are concerned about the U.K economy and they are diversifying in part into gold.”