Gold and Silver Prices Undermined by Rising Bond Yields, Leading to Oversold Territory
Gold and silver prices have been negatively impacted by the rise in bond yields, which has resulted in the overselling of both precious metals. Bullion banks have taken advantage of the situation by driving prices lower and covering their short positions. As of this morning, gold was trading at $1934, down $32 from last Friday, while silver stood at $23.46, down 83 cents for the week.
One notable observation is the exceptionally low volume in the gold contract on Comex, indicating a lack of participation in this specific contract. This trend is further confirmed when examining Open Interest, which has decreased significantly. This decrease in Open Interest means that the ability of bullion bank traders, also known as the Swaps, to shake out the longs in the Managed Money and Other Reported categories is becoming increasingly limited. The Commitment of Traders Report from July 25 revealed that the Managed Money category was net long 95,287 contracts, with the Other Reported category net long 78,352 contracts. However, with Open Interest contracting by 40,690 contracts since then, these net long positions are entering oversold territory.
Unfortunately for those holding long positions, and to the delight of the shorts, interest rates and bond yields continue to rise. Recently, the Fed raised its funds rate to 5.5%, while the Bank of England hiked its bank rate to 5.25%. Additionally, charts of 10-year government bond yields are depicting a worrisome outlook. After consolidating significant gains from 2019 to 2020, these bond yields are showing signs of breaking out of flag formations, indicating further increases. US Treasuries could potentially reach nearly 8%, gilts over 8%, and bunds over 6%. Considering the distorted nature of JGB yields due to the Bank of Japan’s debt monetization, it is uncertain how high they will go, but they have already been leading the way on the upside.
The backdrop of rising bond yields serves as the underlying factor affecting precious metal prices. For the past four decades, the cost of funding long gold and silver paper positions has been a major influence on prices. Hedge fund managers still bear this in mind when trading between gold and dollar derivatives. However, when uncertainty arises regarding the future value of a currency, factors such as interest rate spreads become less significant.
As systemic and currency risks begin to influence markets more than paper cost factors, we can imagine the potential impacts on the US economy. These impacts include the combination of the government’s rapidly expanding funding program, soaring interest costs for overindebted private sector borrowers, the collapse of financial asset values, and the potential liquidation of foreigners’ long-term dollar financial investments, valued at approximately $24.5 trillion. A similar scenario could also unfold in Britain, the Eurozone, and Japan, the latter of which holds a government debt to GDP ratio of 263%. This environment could thrust us back to the 1970s, reminiscent of when gold surged from $35 to $850.
In the current relatively stable environment, gold is still considered reasonably priced. However, looking ahead, even without the disruptive introduction of a new BRICS gold-backed currency, the situation is bound to change significantly.
DISCLAIMER:
The above article is for informational purposes only and should not be considered as financial advice. The content is based on the personal opinion of the author and is subject to change. It is important to conduct thorough research and seek professional advice before making any investment decisions.
