Gold Slips Again as Bond Yields Hit 24-Year Highs, and Oil Isn't Helping

Jimmy Wong

Gold lost ground for a second week in a row, finishing Friday at around US$4,145 an ounce. That's about 3% lower on the week and 4% lower than a month ago. Silver fell about 4% to just above US$61, still around half its January high.

So what's pressuring gold? We need to look at US interest rates first, then oil.

US interest rates and the bond market. The US 10-year yield, the rate the government pays to borrow for ten years, rose above 5.3% this week. That's its highest since 2002, and it followed the Fed's September hike and a stronger growth report. Why does that hurt gold? Because gold pays no interest. When bonds pay more, gold looks less attractive, and a stronger US dollar adds to the pressure.

Friday's jobs report looked like good news for gold. US employers added just 29,000 jobs when about 85,000 were expected, unemployment rose to 4.2%, and earlier months were revised down. Gold jumped more than 1% on the news, then gave it all back. Traders still expect the Fed to hike again. The odds of a hike in October have dropped to about one in five, but a December hike is still priced at better than three in four. The 2-year yield, which shows where traders think the Fed is heading, is about 4.8%, well above the Fed's own rate of 3.75% to 4.00%.

Iran and oil. Oil is the other piece. On 26 September, the US turned down Iran's seven-day plan to reopen the Strait of Hormuz. Brent crude, the global oil benchmark, jumped to about US$108 before easing as talks through Qatar carried on. You'd expect that to help gold, since people buy it when the world feels scary. This week it did the opposite. Higher oil feeds inflation fears, and that keeps rate-hike talk alive, which hurts gold.

But the physical picture is calmer than the headlines. Gulf oil exports outside Iran are back close to pre-war levels, helped by tankers escorted by the US Navy and by pipelines that go around Hormuz. Those pipelines now carry about 40% of the region's crude, up from 17% before the war. Fuels like diesel are still well behind. Iran's grip is loosening even though talks have stalled, so any extra price added to gold for war fears looks fragile.

So what has changed? Mostly the path of interest rates, not the reasons people own gold. Gold is still up about 8% on a year ago, and the long-term case still rests on central bank buying and countries spreading their reserves beyond the US dollar. That demand hasn't changed. The risk sits on the rates side: with the 2-year yield well above the Fed's own rate, rates could still go higher.