The markets are experiencing a general trend of selling off assets, with the exception of oil. This is because Federal Reserve dove Neel Kashkari recently expressed that there is a 40% chance of the Fed’s interest rate hikes not being over this year, and rates may need to increase significantly to control consumer spending and bring inflation back to target. As a result, investors are becoming cautious and seeking safe haven assets.
In the safe haven space, gold is facing tough competition from bonds. US 2-year bonds were sold for over 5% at auction, while 10-year notes yield 4.56%. Meanwhile, gold continues to yield zero returns. In a risk-averse scenario, the widening gap between bond yields and gold’s lack of returns puts gold at a disadvantage.
However, there are some positive factors supporting gold. Countries such as BRICS and those unfriendly to the US are increasing their gold purchases. Additionally, the weakness in the Chinese yuan is making gold an attractive investment in China. These factors have helped keep gold at relatively high levels this year, remaining near record highs against several currencies.
While the current trend for gold against the US dollar is downward, with a fourth consecutive lower high, the key level to watch is $1884. If gold falls below this level, there is limited support until the low $1800s. Despite this, some analysts remain optimistic about gold’s future. They believe that gold will rally once the Fed makes a policy shift, and seasonally, gold tends to perform well starting in November. Therefore, patience may be the best strategy for investors at the moment. Ultimately, there is a demand for safe haven assets, with a significant amount of money flowing into long-term bond ETFs this year. While the shift towards falling interest rates will eventually benefit gold, it is not the current situation.