On Wednesday, September 6th, gold futures recorded their second consecutive day of losses, primarily driven by the persistent surge in US government bond yields. Added to the mix were growing concerns that the Federal Reserve (Fed) might opt to maintain high interest rates for an extended period, casting a shadow over the precious metal.
Gold futures experienced a decline of $8.40, marking a 0.43% drop, with a closing price of $1,944.20 per ounce. Silver followed suit, sliding by 37.00 cents, a decrease of 1.55%, and settling at $23.503 per ounce. Platinum futures also suffered, falling by $18.20, or 1.95%, to close at $915.30 per ounce. Palladium, though relatively more resilient, dipped by $3.30, or 0.3%, and settled at $1,210.70 per ounce.
The root of gold’s woes lay in the soaring yields of 2-year US government bonds, which are intricately tied to the Federal Reserve’s monetary policy. These yields surged past the 5% threshold overnight, as market participants anticipated that rising oil prices could prompt the Fed to hike interest rates in a bid to control inflation.
The surge in bond yields had a twofold impact on gold. Firstly, it increased the opportunity cost of holding the precious metal. Since gold generates no interest, investors are less inclined to park their funds in it when alternative investments like bonds offer attractive returns. Secondly, the rise in yields signaled a potential shift in monetary policy, stoking fears of a prolonged period of high interest rates.
Lukeman Otunuka, an analyst at FXTM, noted that the unexpectedly robust growth in the US service sector indexes had raised concerns about inflation within the market. This, in turn, could compel the Fed to maintain elevated interest rates for an extended duration.
The Institute for Supply Management (ISM) reported that the US services sector index reached 54.5 in August, surpassing analysts’ expectations of 52.5 and improving upon July’s figure of 52.7. Impressively, this marked the eighth consecutive month of expansion in the US services sector, as the index continued to remain above the critical 50-point threshold.
CME Group highlighted that following the release of the ISM service sector index, investors assigned a 48.8% probability to a 0.25% interest rate hike by the Fed at its November 1 meeting. Moreover, an overwhelming 93% of investors believed that the Fed would maintain interest rates at their current levels during the meeting scheduled for September 19-20.
As the intricate dance between bond yields, inflation concerns, and Fed policy unfolds, the trajectory of gold and other precious metals remains uncertain, leaving investors vigilant for further developments.
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Thursday, September 7, 2023