Gold continues to decline for the third consecutive day, reaching its lowest levels since last September, with a break below the $2,600 level per ounce in spot transactions.
Gold’s decline comes amid concerns about the higher-for-longer interest rates with Donald Trump’s return to the White House and the implementation of policies that might fuel inflation and business growth, which was reflected in the continued rise in Treasury yields.
Despite the recent interest rate cut by the Federal Reserve last week, it did not provide a boost to sentiment regarding the continuation of the cuts into next year.
We are witnessing a gradual decline in the probability of the Fed cutting rates next January, reaching 20% today after exceeding 60% a month ago. Also, if the Fed cut rates in January, the probability of further a cut in March is only 11%, after exceeding 60% a month ago, according to CME FedWatch Tool figures.
The diminishing likelihood of a rate cut next year has driven yields on 2-year Treasuries—highly sensitive to shifts in short-term interest rates and expectations—up at a faster pace than 10-year Treasuries. This surge has propelled 2-year yields to their highest level since July, reaching 4.33% today.
As a result, bonds may ultimately become more attractive as investors seek to capitalize on relatively high yields that could remain elevated for longer than anticipated, potentially shifting focus away from non-yielding gold. Additionally, rising risk appetite in the markets, exemplified by record highs in stocks and cryptocurrencies, is reducing the appeal of the yellow metal. This, in my view, could lead Wall Street portfolios to shift toward a blend of high-upside stocks and high-yield bonds.
This narrative has been reflected in the continued massive outflows from physical gold exchange-traded funds, with the SPDR Gold Trust (GLD) recording negative inflows of more than $1.4 billion since the beginning of last week through Monday. While the iShares Gold Trust (IAU) did not record any inflows during that period, except for positive inflows of about $290 million yesterday.
On the other hand, on the upside, the uncertainty over the future growth that may cloud the Chinese economy with the return of Trump and his tendency to exacerbate trade wars, may enhance gold’s status as the most prominent safe haven in China. The continued contraction in house prices and the difficulty that Chinese stocks are facing in holding their gains amid pessimism about the effectiveness of economic support packages may reinforce this hypothesis. While Asia accounts for the largest share of global demand for gold bars and coins.
