This month’s breakout in gold prices is the third occasion in the last three years that we’ve seen gains in excess of $100 in a calendar month.
In February 2016, the gold price rallied by over $120 on the month, and then followed that up in June 2016 with a similarly large $107 move, on the back of the fallout from the Brexit referendum.
At the same time, equity markets finished the month in negative territory, sliding back on the perception of a deteriorating global macro-economic environment, particularly in China, where policymakers were striving to convince the rest of the world they weren’t trying to actively devalue the yuan.
We saw a similar scenario play out in June, when equity markets also slid back over concerns about the impact the Brexit vote might have on investors attitude to risk. On both occasions US 10-year yields were below the levels they are now, and had slid back in the wake of the US Federal Reserve's first rate hike since the financial crisis, with the 10-year dropping from 2.35% at the end of 2015 to a low of 1.32% in July.
This month gold prices have rallied along with stock markets, in contrast to how they behaved in 2016. The behaviour in the bond market however has been a little bit different, not that you would know it at first glance. We’ve still seen the same decline in yields, to record lows in the case of the German bund, while US 10-year yields have also fallen back quite sharply, to their lowest levels since late 2016.
US recession fears fuel gold price
What appears to be different now is the performance in the shorter end of the yield curve, where differentials are much narrower. In 2016, the shorter end of the curve had much lower rates from where they are now, meaning that the yield curve had a fairly decent positive slope. That is not the case now, and while fears of a yield curve inversion aren’t anything new, (we’ve been talking about them for a while now) they appear to have come to a head this month. The 5-year versus 3-month inversion is the latest in a number of growing parts of the US curve starting to roll over from the long end to the shorter end, raising concerns about the prospect of a possible US recession.
The recent indications from the European Central Bank, as well as the Federal Reserve, would appear to suggest that we are on the cusp of further significant easing measures in the months ahead. This has added further fuel to the gold fire, with the recent move above $1,370 the potential catalyst for further gains towards the $1,485 level, which would be a 50% retracement of the entire down move from the 2011 record highs of $1,921 to the January 2016 lows of $1,046, as US recession fears grow.
Gold prices - Gold Cash chart
Source: CMC Markets
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