Bonds Rally Signals the Bid for Gold Will Continue

The U.S. Comex gold futures dipped to $1,298.30 on Tuesday as the FOMC meeting has started. Last week, the futures fell 0.47% after declining 2.09% in the week before. The prices have dropped about 1.80% so far in July. The Dollar Index surged to 81.214 on Tuesday, the highest level since the end of January. From the recent low in May, the Dollar Index has rebounded 2.64%. The S&P 500 Index, the Euro Stoxx 50 Index, and the CRB Commodities Index returned -0.42%, 0.49%, and -0.57% respectively in the past two days. The U.S. ten-year government bond yield finished at 2.46% on Tuesday, almost 7bp lower than at the end of June. The German ten-year Bund yield ended at an all-time low on Tuesday at 1.12%.

Bond Markets Signal Not All is Well

It turned out that not just the German Bund yield has reached a historical low. According to Bloomberg, the ten-year government bond yield of 21 out of 25 developed countries is at or close to this year’s low. Global central banks are keeping interest rates at a historic low to help promote economic growth. With Russia’s continuous support of the separatists in Ukraine, the EU and the U.S. have coordinated more sanctions against Russian banks, energy, shipbuilding, and defense companies, restricting them from billions of financing sources. Israeli bombing on Gaza also continues. Geopolitical risks have helped to bid up demand for the safer government bonds in the advanced countries and also gold. With the central banks keeping interest rates artificially low, gold can also serve as a portfolio hedge when the bond and equity markets crater due to the rising yields.

Investor Positioning

The managed money net total combined gold positions increased 3.14% to 136,120 contracts during the week of 22 July, led by a reduction of the short positions by 18.60%. While the uncertainty in the world has kept the traders’ interests in gold, the rebound in the U.S. economy has led to a greater-than-expected surge in the July U.S. consumer confidence index to 90.9, the highest level since October 2007. The tug of war between the need for safe-haven assets such as gold and the prospect of an earlier than expected rate rise in the U.S. may likely keep gold prices locked in a tight range.