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Gold prices could defy the signal being sent by bond markets and rise over the coming weeks according to a new assessment from the World Gold Council.
Analyst Jeremy De Pessemier says in a new monthly research note that the recent rise in long-dated U.S. treasury yields relative to short-dated yields would typically support a view that the U.S. economy is entering a new growth phase.
Such developments are traditionally unsupportive of the gold price which tends to underperform in periods when investors are in risk-seeking mode, which typically occurs at the start of a positive economic growth cycle.
The 1.0% decline in spot gold prices in August suggests the precious metal is indeed following the bond playbook with anecdotal evidence suggesting retail players have joined institutions in selling gold.
"In late summer 2023 we are only just noticing sellers coming back to the market to allow us to refill our depleted gold stocks," says London bullion company Auronum in a recent note.
But De Pessemier says gold could be set to benefit as there is a chance the bond market signals are being misinterpreted.
The recent 'bear steepening' in the bond yield curve would typically be associated with rising equity markets and falling gold prices, but equity markets have been falling over recent weeks.
De Pessemier says the rise in 10-year bond yields could therefore reflect a rising risk premium in a market that is turning more cautious, a development which typically favours the safe-haven status of gold.
"A shift up in the 'higher interest rates for longer' narrative, supply and demand forces and a rise in the risk premium," could be behind the move he says.
"The latter factor might start to provide support to gold prices if it continues to increase," he adds. "Particularly given the building evidence that suggests the U.S. economy is slowing markedly."
Gold bullion investors will be the first to note that July U.S. jobs figures were revised lower again in August which has become a pattern in recent months. This is a sign that the U.S. jobs market may not be as strong as first hoped.
Any signs of economic weakness are being construed as a potential indication that policymakers will slow the pace of interest rate increases. Anticipation of a pause or rate cut is expected to weigh on the dollar and support gold prices.
The World Gold Council reports global gold ETFs saw another monthly outflow in August with total AUM falling US$3BN (46 tons), with the majority coming from U.S.-listed funds.
COMEX managed money net long positioning declined to a five-month low, before ending the month at 181t. OTC daily trading volumes remained elevated at US$143bn/day.