While gold investors are celebrating a positive first quarter, one research firm has sent up a warning signal as it sees significant risks to the downside because of rising real bond yields.
In a report Tuesday, New Zealand-based research firm Topdown Charts, said that the growing divergence between gold prices and rising real interest rates is becoming “increasingly precipitous.”
Traditionally, higher real interest rates weigh on gold prices, increasing the precious metal’s opportunity costs as a non-yielding asset.
But, Callum Thomas, head of research for Topdown Charts, noted in his analysis that since November, real interest rates have been moving higher and so have gold prices. He added that the correlation breakdown can’t last forever.
“Correlations like these can and do break down at times, and there is every possibility that the gap in the chart closes by real yields going back below zero. However, as the fed hikes interest rates and continues the transition from QE to QT, real yields are likely to remain elevated,” Thomas said in his report.
In the first three months of the year, gold prices rose 2%; June Comex gold futures last traded at $1,335.7. At the same time, data from the U.S. Treasury show that real 10-year rates have risen 22%, from 68 basis points to 84 basis points.
The analyst added that there is a risk that gold prices eventually fall to below $1,000 an ounce as the negative correlation with positive bond yields and gold price reasserts itself.
Thomas said that gold has been able to fight rising yields because of its appeal as a safe-haven asset; however, he added that he doesn’t expect this trend to have a long-term impact.
“A big explanation as to why gold has diverged from real yields is hedging demand as investors worry about a potential bear market and heightened geopolitical risks. But even if that is your thinking, the idea of opportunity cost is still relevant,” he said. “I would be cautious in treating gold as a hedge though, because when an asset class is facing significant headwinds like this, it may not end up behaving in the way you expected.”
Not only does Thomas see gold as overvalued as a safe-haven monetary metal, he also sees it overvalued as fundamental commodity.
Looking at gold’s technical picture, Thomas said that anyone shorting gold at current levels should look at significant resistance at $1,375 an ounce and $1,400 an ounce.
He added that his initial targets are the 2017 lows at $1,250 an ounce and then the 2016 lows at $1,130 an ounce.
For silver, he said that he sees the market trading at fair value. Comex May silver futures last traded at $16.385, down almost 4% since the start of the year.
Reference: Kitco
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