Gold Prices Touch Six-Month Lows Amid Strong U.S. Dollar and Rising Treasury Yields

“Gold Prices Touch Six-Month Lows Amid Strong U.S. Dollar and Rising Treasury Yields”

Gold prices on the London spot market have reached a six-month low, driven by a robust U.S. dollar and increasing Treasury yields. The expectation of sustained higher interest rates has led to heightened demand for U.S. assets. Despite a weaker Indian Rupee, domestic gold has followed suit, with MCX futures plummeting to their lowest level since March 2023, at Rs 57,500 per ten grams.

Gold initially showed strength earlier this year, posting gains of over 13 percent in the first five months. However, it has since consolidated within a narrow range. Last week, it breached the critical support level of $1,880 per ounce.

Recent movements in gold prices have been primarily influenced by real interest rates. While gold appears promising as a long-term investment, it may not offer significant returns in the very short term. Short-term investors are drawn to higher real income opportunities in government bonds and currency, making gold relatively less appealing.

The expectation of prolonged higher U.S. rates has boosted the value of U.S. assets. The real yield on the U.S. 10-year treasury bond has risen to a decade high this year. The U.S. dollar, while relatively stable in the first two quarters, has recently gained momentum. The dollar index, measuring the currency’s value, has surged by over seven percent since mid-July, reaching well above the 106 level.

Gold and the U.S. dollar often exhibit an inverse relationship. When the dollar strengthens, gold prices in dollars typically fall, and vice versa. This inverse correlation stems from gold’s global pricing in U.S. dollars. A stronger dollar means it takes fewer dollars to purchase the same amount of gold, resulting in a price decline.

A robust U.S. dollar is often associated with higher interest rates set by the U.S. Federal Reserve. Elevated interest rates can make alternative investments such as bonds and savings accounts more attractive due to higher returns. As interest rates climb, the opportunity cost of holding non-interest-bearing assets like gold rises, potentially diminishing gold demand.

Additionally, gold is often viewed as a safe-haven asset, sought by investors during periods of economic uncertainty or market turbulence. A strong U.S. dollar can signal confidence in the U.S. economy and financial markets, prompting investors to shift away from safe havens and toward riskier assets like stocks and bonds.

While gold-backed ETF holdings have hit multi-year lows, reflecting reduced investment interest, optimism remains for substantial physical demand from key markets like India and China. Reports suggest a surge in gold demand from China due to economic concerns. With the key demand season yet to commence in India, the second-largest gold consumer, domestic demand may increase, providing support to prices.

In summary, persistent pressure on gold from real U.S. interest rates is offset by expectations of robust physical demand from China and India, potentially limiting significant price declines. Reports of heightened gold demand from China, along with the upcoming Indian demand season, could provide crucial support to gold prices.

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