Oddly, Gold Benefits From Rising Treasury Yields

Key Insights

• Gold rallied towards the $2,000 level amid rising geopolitical tensions.
• The prices of U.S. government bonds are under pressure due to multiple factors. 
• Some investors, who are looking to purchase safe-haven assets, may prefer to buy gold instead of U.S. government bonds.

Gold got a huge boost from geopolitical tensions. At the start of October, gold was trading near the $1,815 level as traders were worried about rising Treasury yields.

Hamas’ violent attack on Israel changed everything for gold markets as traders rushed to buy safe-haven assets, pushing the price of gold towards the $2,000 level.

Traders feared that nearby countries or certain groups within these countries will be dragged into the conflict, creating risks for oil supplies and trade routes.

While most risks have not materialized yet, traders continue to buy gold to protect their portfolios against the escalation of the conflict. The recent reports, which indicated that Israel was ready for a ground operation against Hamas, provided additional support to gold markets.

Traditionally, rising Treasury yields serve as a negative catalyst for gold and other precious metals that pay no interest. However, things are not as simple right now. In fact, rising Treasury yields provide additional support to gold. Here’s how.

Bond traders sell U.S. government bonds as they believe that Fed may raise rates again this year. In addition, Fed is expected to keep rates at high levels for many months.

U.S. government bonds are traditional safe-haven assets. However, their price is falling due to Fed policy outlook. Fed’s quantatitive tightening and U.S. budget deficit serve as additional bearish catalyst for bond prices. In addition, recent data indicates that China is selling U.S. government bonds as tensions between the countries increase month by month.

In this environment, some funds that could have been used to buy U.S. Treasuries may be moving into gold markets, pushing the price of gold to new highs.

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