It is evident that within the 9% rally in gold over two weeks, starting from the Hamas terrorist attack on Israel, there is a geopolitical risk premium. The incredible part is that the precious metal has severed its connection with the real yield of U.S. Treasury bonds, which has been stable since 2008. Furthermore, it did this before the conflict in the Middle East escalated.
The price of gold is determined not by inflation, Chinese and Indian demand for physical assets, or capital flows into ETFs. It is determined by the cost of money. The higher the interest rates, the more expensive the money, and the lower the XAU/USD quotes. This relationship has been stable since the global economic crisis in 2008-2009. However, in 2022-2023, everything started to go awry.
Dynamics of gold and real Treasury bond yields
Central banks were the first to act, and their appetite for gold in 2022 was insatiable. The armed conflict in Ukraine and the associated freezing of the gold and currency reserves of the Bank of Russia served as a catalyst for de-dollarization. Regulators actively started exchanging paper money for the precious metal. Their gold purchases reached a new record last year.
In 2023, Chinese consumers added fuel to the fire. Their desire to purchase the precious metal was so immense that the price difference in Shanghai and London exceeded $100 per ounce. The increase in physical asset demand from central banks and China shattered the connection between XAU/USD and the real yield of U.S. Treasury bonds. The crisis in the Middle East further reduced the correlation.
The rise in 10-year debt yields to the highest levels since 2007 continues to lead to capital outflows from gold-oriented ETFs. They are losing out to other specialized exchange-traded funds. However, when Hezbollah aimed its rockets at Israel, the precious metal almost jumped to $2,000 per ounce. Its rally began due to the closure of speculative net shorts and gained momentum because of active hedging of geopolitical risks.
Buying gold as insurance against the potential escalation of armed conflict allows other financial market assets to stay in their comfort zone. Without the precious metal, stock indices and U.S. Treasury yields would likely plummet.
What’s next? If the situation in the Middle East can be resolved diplomatically, we should expect a significant drop in XAU/USD. Involvement in military actions by Iran could lead to a rise in gold to record highs. In any case, maintaining geopolitical tension will sustain a high demand for the precious metal. However, its medium-term prospects depend on a recession in the U.S. economy and the Fed’s dovish pivot. Without these factors, sustaining a stable upward trend is unlikely.
From a technical perspective, the formation of a pin bar with a long lower shadow near the 61.8% Fibonacci level of the last upward wave provides a basis for buying on a breakout of resistance at $1982 per ounce.
The material has been provided by InstaForex Company – www.instaforex.com
It is evident that within the 9% rally in gold over two weeks, starting from the Hamas terrorist attack on Israel, there is a geopolitical risk premium. The incredible part is that the precious metal has severed its connection with the real yield of U.S. Treasury bonds, which has been stable since 2008. Furthermore, it did this before the conflict in the Middle East escalated.
The price of gold is determined not by inflation, Chinese and Indian demand for physical assets, or capital flows into ETFs. It is determined by the cost of money. The higher the interest rates, the more expensive the money, and the lower the XAU/USD quotes. This relationship has been stable since the global economic crisis in 2008-2009. However, in 2022-2023, everything started to go awry.
Dynamics of gold and real Treasury bond yields
Central banks were the first to act, and their appetite for gold in 2022 was insatiable. The armed conflict in Ukraine and the associated freezing of the gold and currency reserves of the Bank of Russia served as a catalyst for de-dollarization. Regulators actively started exchanging paper money for the precious metal. Their gold purchases reached a new record last year.
In 2023, Chinese consumers added fuel to the fire. Their desire to purchase the precious metal was so immense that the price difference in Shanghai and London exceeded $100 per ounce. The increase in physical asset demand from central banks and China shattered the connection between XAU/USD and the real yield of U.S. Treasury bonds. The crisis in the Middle East further reduced the correlation.
The rise in 10-year debt yields to the highest levels since 2007 continues to lead to capital outflows from gold-oriented ETFs. They are losing out to other specialized exchange-traded funds. However, when Hezbollah aimed its rockets at Israel, the precious metal almost jumped to $2,000 per ounce. Its rally began due to the closure of speculative net shorts and gained momentum because of active hedging of geopolitical risks.
Buying gold as insurance against the potential escalation of armed conflict allows other financial market assets to stay in their comfort zone. Without the precious metal, stock indices and U.S. Treasury yields would likely plummet.
What’s next? If the situation in the Middle East can be resolved diplomatically, we should expect a significant drop in XAU/USD. Involvement in military actions by Iran could lead to a rise in gold to record highs. In any case, maintaining geopolitical tension will sustain a high demand for the precious metal. However, its medium-term prospects depend on a recession in the U.S. economy and the Fed’s dovish pivot. Without these factors, sustaining a stable upward trend is unlikely.
From a technical perspective, the formation of a pin bar with a long lower shadow near the 61.8% Fibonacci level of the last upward wave provides a basis for buying on a breakout of resistance at $1982 per ounce.
The material has been provided by InstaForex Company – www.instaforex.com
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