Precious Metals Weekly – US yields in driver seat

by: Georgette Boele

140220-Precious-Metals-weekly.pdf ()

  • Gold rally lost momentum this week
  • Precious metals are currently not driven by safe haven demand and cyclical forces
  • …US 10-Y yield is currently a crucial driver

What has been the supportive gold drivers this year?

Gold prices have rallied by more than 8% so far this year and there are several reasons behind this strong performance. For starters, the ascent happened in an environment of weaker-than-expected US data, which have resulted in doubts about the strength of the US economy. This also has hurt the overall sentiment on the US dollar, so gold prices moved higher. Moreover, Chinese demand is expected to be strong this year again. In addition, there is anticipation that the gold import duty in India may be lowered. This has triggered expectations that gold demand from India will increase this year. Furthermore, uncertainty surrounding emerging markets and inflation fears in some countries also have supported gold prices. Last but not least, the prospect that gold prices may not sell off this year has resulted in an increase of investment demand, supporting gold prices.

Why have gold prices drifted lower since Monday?

Gold prices rallied above USD 1,330 per ounce a few times last Monday and early Tuesday. However, every time this happened, prices were quickly pushed lower again, which could be related to order activity. Since then, prices have drifted lower. Weaker than expected US data on Tuesday and Wednesday failed to support gold prices. In addition, the FOMC minutes were perceived as less dovish, because they signaled that the tapering will continue. This also resulted in pressure on gold prices and gave the US dollar the opportunity to recover. Uncertainty in the Ukraine and some weakness in emerging market currencies have not provided support either. The short-term technical picture remains constructive as long as the support level USD 1,307 per ounce holds.


Not only gold prices have performed well so far this year, the other precious metals also did well. Silver has outperformed all the precious metals, which in a way is surprising. The environment has not been very constructive for cyclical precious metals, mainly because US economic data have been weaker and there are concerns about the US and China. Currently, all the precious metals (including gold) have a small negative correlation with the US equity volatility index (VIX), which indicates that they have no safe haven attributes. Moreover, they are also negatively correlated with US equities. Gold and silver have a more significant negative correlation than platinum and palladium. So they don’t have safe haven attributes but neither US cyclical sensitivity.

What is currently driving precious metal prices?

So what is currently driving them? In short, developments in interest rates which also drives the US dollar. As the graph below shows, they are currently very sensitive to developments in the 10-Y US yields. If the 10-Y US yields move lower their prices rise, while if yields move higher precious metal prices drift lower. We expect US 10-Y yield to rise this year and next year, driven by a strong US economy. Moreover, we expect a strong rise in the US dollar. This is absolutely not supportive for precious metals.

PM weekly graph