Gold and Silver bounce — But the bond market still holds the reins

Gold and silver are attempting a rebound this Monday after another bruising week.

Gold finished last week down over 3%, while silver dropped roughly 6%. But this morning we've seen a 1-2% rebound.

Those gains offer some relief, but both metals still have ground to recover before this bounce looks like a meaningful change in direction.

The central contradiction remains striking. War threatens energy supplies. Inflation keeps eating away at purchasing power. Governments remain dependent on enormous borrowing.

Yet gold and silver have been falling as traders seek refuge in the dollar and demand higher interest rates on U.S. government debt.

The conditions that make physical precious metals worth owning can also create short-term pressure on their prices.

Last week, the 10-year Treasury yield ended around 5.28%, while the dollar gained roughly 1%. Gold pays no interest, so higher bond yields can draw money away from it.

But a higher yield does not make Washington’s debts disappear, or turn a Federal Reserve note into a reliable long-term store of purchasing power.

Friday’s employment report threw a wrench into expectations of still more Fed tightening. The economy added just 29,000 jobs in September, unemployment edged up to 4.2%, and the previous two months’ gains were revised down by a combined 60,000.

That is hardly evidence of a booming economy that can shrug off rising borrowing costs. Expectations of another October rate increase consequently fell sharply.

Gold initially rallied on the jobs news, but could not hold its immediate gains as bond yields recovered. That response matters: fewer expected Fed hikes will provide only limited relief if longer-term borrowing costs keep climbing anyway.

For a more durable recovery, precious metals need the bond market to cooperate. This morning’s improvement is encouraging, but it has yet to settle that question.

The Middle East adds another complication. Disrupted shipping through the Strait of Hormuz keeps energy supplies under pressure, with Brent crude still around $102 a barrel at last week’s close.

Iran has proposed reopening the waterway subject to U.S. concessions, but the negotiations have yet to produce dependable normal shipping.

Investors are left weighing demand for safe-haven assets against the inflationary consequences of expensive oil.

That helps explain why geopolitical danger has not automatically sent gold soaring. Higher energy costs can encourage traders to expect tighter monetary policy, offsetting some of the demand for protection.

Meanwhile, lower gold prices have attracted physical buyers in the U.S. and elsewhere. However, this has barely been the case with silver, as investors are still shying away from the white metal.