Why Is Gold Not Going Up? Softer US Inflation vs 5% Bond Yields

Why Is Gold Not Going Up? Softer US Inflation vs 5% Bond Yields

By Fazil Thaha, Faz Gold

Why is gold not going up, even after softer US inflation news this week? The short answer is that US government bond yields have climbed to their highest level in more than 20 years, and that has cancelled out most of the good news for gold. Spot gold ended Thursday 1 October at around USD 4,159 per troy ounce in New York, almost flat on the day, according to Kitco, after falling more than 6% during September, according to Reuters.

Many customers have asked me the same question at the counter this week, so here is a plain explanation of what happened, why it matters, and what it means if you buy, hold or sell gold and silver in Singapore.

What happened this week

On Wednesday 30 September, the US released its PCE inflation figures for August. PCE stands for Personal Consumption Expenditures. It is simply the measure of rising prices that the US central bank, the Federal Reserve (the Fed), watches most closely.

The numbers came in lower than expected:

  • Headline PCE rose 3.4% from a year earlier, against forecasts of 3.7%, according to Fox Business and Yahoo Finance.
  • Core PCE, which leaves out food and energy because their prices jump around a lot, rose 3.0% against forecasts of 3.3%.
  • Core PCE rose 0.2% in the month, against forecasts of 0.3%.

Softer inflation usually means the Fed feels less pressure to raise interest rates. The Fed already raised rates in September, as covered in our earlier article on why gold slipped after the Fed hike. After the PCE data, traders cut the chance of another hike at the Fed's 28 October meeting from roughly 70% earlier in the week to around 35 to 37%, based on CME FedWatch figures reported by Babypips, Kitco and Yahoo Finance.

On paper, that is good news for gold. Gold pays no interest, so it tends to look more attractive when interest rates are expected to stay lower.

Why is gold not going up? Bond yields are the main reason

A bond yield is the interest return an investor earns for lending money to a government. The US 10 year Treasury yield is the most watched one in the world. On 1 October it touched about 5.34%, according to Kitco, and Reuters reported that US 10 year yields had reached their highest level in more than 20 years. Yahoo Finance also described yields as being back at 2002 levels.

This matters for gold in a simple way. When a safe US government bond pays more than 5% a year, some large investors would rather hold the bond and earn that interest than hold gold, which earns nothing while it sits in a vault. Kitco's evening report on 1 October made the same point: bond yields are steering most markets right now, and high yields together with a firm US dollar kept a lid on gold even as rate hike bets eased.

A strong dollar adds to the pressure. Gold is priced in US dollars around the world, so when the dollar rises, gold becomes more expensive for buyers using other currencies. Kitco noted that the US dollar index was near its high for the year on 1 October.

The tug of war in numbers

  • Spot gold was about USD 4,183 per troy ounce at 11.51am GMT on 1 October, up 0.6%, according to Reuters via Kitco.
  • By the New York evening it had eased back to about USD 4,159 per troy ounce, according to Kitco.
  • Silver was around USD 61 per troy ounce on 1 October, according to Reuters and Kitco.
  • Gold fell more than 6% over September, according to Reuters.

So gold did bounce on the inflation news, but each rally was sold as yields stayed high. That is why the price has gone mostly sideways for the last few days instead of recovering. For the full story of the sharp fall in late September, see our article Why Gold Fell About 5% in a Week.

What to watch next

The next big test is the US jobs report for September, due on Friday 2 October US time, which is Friday night in Singapore. Reuters listed it as the next key event for gold. Strong job numbers could bring back talk of another Fed hike and push yields higher. Weak numbers could do the opposite. Nobody knows in advance which way it will go, and I would be wary of anyone who says they do.

It is also worth noting that not every analyst sees high yields only as bad news. Nitesh Shah, a commodity strategist at WisdomTree, told Reuters that the recent swings in the bond market point to gold possibly being a better hedge in uncertain times. In other words, if bond markets become unstable, some investors may turn back to gold.

What this means for Singapore buyers

All the prices above are global prices in US dollars per troy ounce. The price you pay or receive in Singapore also depends on the exchange rate and the dealer's premium, so always check the live Singapore dollar prices on fazgold.com.sg or at our counter instead of converting these figures yourself.

Here is how I would think about this week, depending on what you plan to do:

  • If you want to buy: a sideways market can test your patience. If you have a price in mind, our free Gold Rate Alert will email you when our live selling price reaches your target, so you do not have to check the screen every hour. You can also use the free What Can I Buy gold calculator to see which gold bars or silver bars fit your budget.
  • If you prefer to buy a little at a time: the Monthly Savings Plan calculator shows how putting the same amount into gold every month, whatever the price, would have worked out in the past. Past results do not guarantee future results.
  • If you want to sell: our free Sell Calculator shows the live payout per bar before you come in, and you can see today's gold buyback rates online. The buyback price is simply the price we pay you when you sell to us.
  • If you already hold: short term moves driven by bond yields and Fed news come and go. Most of our long term customers hold gold and silver as a store of value, not as a trade on next week's data.

All of these tools are free to use, with no sign up and no obligation to buy or sell. You can find them all in the Free Gold Tools section of our website.

The bottom line

Gold is not going up right now mainly because US bond yields are at a 20 year high and the dollar is firm, and that has outweighed softer US inflation and lower odds of another Fed hike. The September jobs report is the next event that could move prices either way.

Visit Faz Gold

Our counter is at 10 Jalan Besar, #B1-19/20, Sim Lim Tower, Singapore 208787, open daily from 10.30am to 8pm. For live prices or questions, WhatsApp us at +65 9767 7774.

Sources

This article is for general information and market commentary only and is not financial or investment advice.

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