Can Global Uncertainty Push Gold Through $2,000/Oz?

Gold is in a funny place right now. Since hitting a low at the start of October, it has rallied 10% over the last three weeks. But, it seems to be struggling to get through the strong $2,000/oz technical level. This is because traditional analysis suggests that gold shouldn’t be this high.

Sure, the price of gold typically rises when there is uncertainty in the markets. The global geopolitical tensions spurred by the war in Gaza naturally provide the kind of uncertainty that would push gold prices higher. But, it’s fighting against a strong current pushing in the other direction.

What Can Keep Gold Down?

Typically, the price of gold falls when interest rates rise. And interest rates in the US have been rocketing upwards. So, gold should have fallen. Why? Because gold is a great store of value, but doesn’t generate dividends. Buying gold can only be profitable if the price of the yellow metal increases. In fact, it actually costs to hold gold, in the form of lost opportunities to invest in other things.

Those other things are Treasuries, since the US debt is seen as practically the same as holding cash. Treasuries pay interest, and with yields rising above the inflation rate, you can actually make money by holding treasuries instead of gold. That’s why, typically, investors would sell gold in order to buy treasuries as yields rise. But, that hasn’t happened this time around.

The Rising Debt Problem

For starters, the reason yields are rising is because the debt that the US government holds has been increasing at a rate double that of before the pandemic. With the Fed not buying treasuries, and other major holders such as Japan and China selling as well, the market for US debt is limited. Investors are reluctant to buy up US debt, not so much because they worry that there will be a default. Rather, they will be stuck with lower-yield treasuries as yields keep rising in order for the government to attract buyers for its increasing debt emissions.

This phenomenon is what has led to some banks collapsing, while other investment houses are seeing “unrealized losses” from debt. They bought Treasuries when rates were lower, and now those treasuries are worth substantially less. If yields keep rising, because the economy doesn’t grow so fast, there is a recession, the government keeps spending, the Fed keeps raising rates, and a host of other issues – then holding treasuries instead of gold is a bad idea.

Following China’s Lead

China is apparently well aware of this issue, and has been rolling off its Treasury holdings to the tune of over $600B in the last year alone. Meanwhile, the PBOC is buying up gold at a record rate, becoming the largest buyer for the precious metal in the world. Also, with the collapse of the housing market in China, the notoriously thrifty Chinese people are looking for another store of value, with gold being a convenient replacement.

Add to that the recent geopolitical tensions, and gold keeps getting support. That is, as long as investors keep expecting rates to go up. The recent Treasury auctions have shown little interest in buying, and that keeps buoying the yellow metal. The current conditions point to gold keeping the upward trend – unless something comes along to suggest that US yields might come down. Such as the possibility of a recession. The latest GDP figures kind of suggest that’s not a major risk at the moment. But, it is a risk, nevertheless, and something gold traders ought to keep a close eye on.

Trading the news requires access to extensive market research - and that's what we do best.

OPEN LIVE ACCOUNT