Fundamental Analysis

Rising US Treasury Yields Weigh Heavily on Gold Futures (GC)

  • Gold prices are struggling as US Treasury yields make new highs.
  • Markets expect the Fed to maintain its aggressive stance, which might hurt gold prices.
  • The US labor market continues to show resilience amid rising interest rates.

The yield on 10-year US Treasury notes has increased to levels last seen in June 2008, and persistently rising inflation continues to put the Federal Reserve in a remarkably hawkish position, which might lead to further selling pressure on gold (GC) futures. This week, the 10-year US Treasury inflation-protected securities (TIPS) real yield rose to 1.74%, the highest since 2009.

A TIPS investment with a 10-year real yield of 1.74% will provide a return that is 1.74 percentage points higher than US inflation over the ten years. According to a market-based indicator of long-term inflation expectations, the US is likely to experience inflation of 2.4% on average over the next ten years.

Gold vs US 10-year Treasury yields (Source: Tradingview)
Gold vs US 10-year Treasury yields (Source: Tradingview)

When US Treasury real rates rise, gold struggles because bullion investment generates no interest. This explains why the historical negative correlation between gold and US real yields is still present. The Fed’s willingness to raise interest rates is reflected in real yields, which are higher when the Fed is more willing to pursue an aggressive monetary policy.

The Labor Department reported an unexpected reduction in the number of persons applying for unemployment benefits for the first time last week, providing another positive reading of the American labor market.

The job market has so far shown minimal impact from rising interest rates, indicating the Fed may still need to strive to reduce the total demand that is maintaining high pricing pressures. There haven’t been many signs that the labor market is dramatically loosening up or that businesses are beginning to put people out of work.

The Labor Department reported that initial claims for state unemployment benefits dropped unexpectedly by 12,000 to a seasonally adjusted 214,000 for the week ending October 15.

“Even as the economy slows, employers appear to be reluctant to lay off workers that they have struggled to hire and retain,” Nancy Vanden Houten, lead US economist at Oxford Economics, wrote in a note to clients.

Money markets expect the Fed to raise rates by 75bps in November and 70bps in December. Gold futures prices may continue to fall if investors’ expectations for future rate increases rise.