Is It A Nightmare For Gold Buyers: Higher Yields Impacting Gold Prices?

As expected, China is back with its news to the markets again raising concerns regarding the trade dispute between the two economies (US and China). The holidays witnessed by the Chinese markets in the last weekend allowed the global markets to divert their focus towards other macro-economic indicators like the interest rates and higher bond yields. This week the market participants need to brace themselves for the news regarding the trade tensions which have the potential to derail the global growth. Moreover, the concerns for growth in the emerging economies would also be a major factor. Any escalation in the trade wars between the US and China would likely to disrupt the broader equity markets, business and consumer sentiments.

The market participants would be looking to deploy their investable capital towards safe-haven assets. Therefore, they might consider gold for making investments. However, it seems like the macro-economic variables have not spared even gold. The prices of gold have been experiencing the impact of the weaker global economy. The strong outlook of the global central bankers for the US economy might prompt the Federal Reserve to hike the interest rates even further after the apex bank has already raised the rates thrice in 2018. This hawkish monetary stance of the Federal Reserve is being witnessed since December 2015. The US economy is being fueled by the lower unemployment rate as well. Last week, the yields on the government bond witnessed a strong momentum on the back of strengthened dollar as well as bullish outlook on the economy. The trade war between the US and China could dent the global economic growth. Also, the American companies having operations in China have already complained that they have been facing the impacts of the Trump administration’s decisions.  

Any global tension spooks volatility in the equity markets which prompts the investors to make outflows from the equity markets and rather go for the investments in the safe-haven assets. However, with the impact on the gold prices, the investors are clearly in a dicey position as to what could be done. The global economists are of the view that the Fed would be raising the interest rates in December meeting and thus, the variables which support the investments into gold like volatile equities are being offset by the anticipation of the increased interest rate environment. Now why higher rates impact gold prices? The reason is simple. The rise in the interest rates, in turn, leads to the appreciation of the dollar as well as yields on bonds. This situation pressurizes the gold as the opportunity cost of keeping gold increases.

The US dollar has been appreciating against the major currencies primarily because of the elevated US bond yields. Gold was considered as an asset class on which the global investors can count on during the tough times like economic as well as political uncertainty. However, it seems like this tag has been taken away from it because the investors seems to be making investments towards the US dollar. Earlier, there were expectations on the Fed that it might not consider increasing the rates because of the escalating trade dispute between the US and China. Now that ship has already sailed, and the Fed is bullish on the US economy. They need to check the inflation level and thus they play with the interest rates.

With this, some ASX listed gold stocks were seen to be moving on a downtrend. For instance, Evolution Mining Limited (ASX: EVN) witnessed a fall of 1.5% in its stock price on October 10, 2018, 2:20 PM AEST.

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