3 reasons for the rise of Gold prices

Recent weeks saw gold hitting the news, and it is no doubt a meteoric rise of the precious metal that lured investors in times of haven-seeking mode. Indeed, we saw gold rise to $2042 an ounce, almost hitting a record high in 2020 when the price reached $2069.40.

Over the past month, it has jumped by about 12%. From its low in November, the ascend has been magnificent- a 25% rise.

So, let us explore 3 reasons for the shiny yellow metal to be in the spotlight again.

A declining dollar boosts gold prices

Indeed, we have seen a drop in greenback. Essentially, this boosts commodities prices, given all other factors remaining constant. With the Fed less likely to raise rates, we have seen the USD weakening, supporting gold prices.

Bond yields are decreasing

The relationship between bond yields is that gold prices are pretty much inverse. As bond yields fall, there is now lesser competition for gold since it produces no income. We have seen the 2-year Treasury yield hovering around 3.8% on Tuesday, a tumble from its high of 5.1%.

Nonetheless, bond yields in other markets are holding up well, thus reducing the demand for US bonds, and this weighs on the demand for US dollars, thus causing it to have depreciation pressure and further support gold prices too.

A safe haven in times of risk-aversion

The falling bond yield also coincides with the expectation that the Fed is moving towards the end of its rate hike cycle, given intense geopolitical tension and the banking turmoil.

Likewise, there is also an expected upcoming fight on the debt ceiling. All these factors motivate traders to shift their assets towards gold exposure, further boosting it in times of uncertainty.

As gold hits above $2000, it has now surpassed the psychological barrier, and the next movement could rest upon Fed’s monetary policy guidance. Nonetheless, given the current outlook on bond yields coupled with the general sentiments towards a less risk-on mode, we are seeing more tailwinds for gold prices to run.

That means companies producing and selling gold are also beneficiaries of this general market trend. One may consider Newmont (NEM) or VanEck Gold Miners ETF (GDX), which had performed considerably well.

However, note a word of caution, as always, gold mining stocks tend to have larger volatility than owning gold outright. This is largely due to the more outsized impact of gold prices on miners’ profitability. Simply put, there is a little marginal cost to mine an additional ounce of gold regardless of whether the price is at $1800, $2000 or even $2200. Thus, the bottom line is the key barometer for gold miners, a factor to consider. After all, miners do face inflationary pressures from multiple fronts, such as in the cost of labour, diesel fuels and even the equipment to mine and process gold.

The blessing is that higher gold prices have helped cushion these cost rises.

We are positive on gold and are prepared to accumulate in the sea of stormy sun, which seems ironic but relatively rational in the current environment.

What’s on the menu today?

At 8.15 pm, we will have the ADP Nonfarm Employment change for March. We expect it to drop from 242K to 200K.

The S&P Global Composite PMI will be released at 9.45 pm. The expectation is for it to remain at 53.3. Service PMI will also be in focus, and 53.8 is the target, unchanged from the prior period.

Then comes the ISM Non-Manufacturing PMI for March. A softening is in the card at 54.5, a drop from 55.1.

It is 5 April, Wednesday, at 9.10 am in Singapore and 9.10 pm in New York. A cooling morning to all, and we wish everyone a splendid start to the first trading week of April.