Gold Stutters as Bond Yields Tick Upwards

The start of the week saw prices of both silver and gold drop as treasury yields rose ahead of a policy announcement by the Federal Reserve. Silver dropped to $58.12 an ounce, representing a 0.4% decrease. At the same time, gold dropped by 0.1% while palladium and platinum prices rose. 

This comes as traders continue to look past the widely expected rate cut for signals about monetary policy in the coming year. This announcement, coupled with expected government debt auctions, may reshape expectations for next year. Given that precious metals don’t raise interest, increasing rates often negatively affect their prices. 

In a recent interview with CNBC, Kevin Hassett argued that offering a firm rate outlook for the next 6 months would be irresponsible. Hassett, the current Director of the White House National Economic Council and contender for the position of Fed chair, explained that policymakers needed to follow the data. 

Interest-rate swap markets continue to price in an almost guaranteed 0.25-point cut at the end of this week’s meeting, with traders expecting the Fed to deliver only two additional cuts by late next year, down from the three moves anticipated just a week earlier. Expectations of looser monetary conditions also continue to support silver’s recent surge, with the metal’s price more than doubling in value this year, which significantly exceeds gold’s roughly 60% rise. 

Despite this, the silver market is still feeling the effects of an unprecedented short squeeze. This comes as one-month lease rates remain high at nearly 6%, even after a huge influx of metal into the largest silver-trading hub globally. Those inflows have tightened supplies elsewhere, pushing Shanghai’s stockpiles to near ten-year lows. 

Strategists at Bloomberg like Nour Al Ali believe that a reduction in interest rates would maintain the supportive backdrop for silver’s strong performance. She explains that crowded positioning increases the risk of sharper price swings. 

Buying activity in Comex silver options has also accelerated, with investors bracing for larger price movements, especially potential further gains. Retail participation is rising too, with the 5-day average volume of micro futures trading reaching levels seen only once before, in mid-October. 

Meanwhile, new figures released this past weekend show that the People’s Bank of China added to its gold reserves for another consecutive month. This brings new holdings to over 74 million troy ounces. Overall, the metals market remains caught between the immediate pressure of rising yields and the longer-term support from expectations of looser U.S. monetary policy. 

All eyes will be on the Fed to digest whatever guidance they provide about the possible monetary policy for the coming year. Gold industry players like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) will be following the proceedings as the trajectory of the metal could be impacted by any announcements made. 

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