The reaction in the gold market may indicate that investors are skeptical about this event...
Gold prices have recently rebounded strongly, breaking through the $2,700 mark for the first time on Friday, with a weekly increase of nearly 2%. This is approximately four times the 0.5% increase of the S&P 500 index for the week and marks the fifth week of gold's rise in the past six weeks.
The Federal Reserve initiated a rate cut cycle last month with a reduction of 50 basis points, after which gold regained its upward momentum. However, the latest increase occurred amidst a rebound in U.S. Treasury yields and the U.S. dollar, which could have otherwise suppressed the rise in gold prices.
Generally speaking, higher yields usually reduce the appeal of gold, as gold does not generate any returns. A strong U.S. dollar can also harm commodities because it makes gold more expensive for buyers outside the United States. Andrew Brenner of NatAlliance Securities wrote, "We are trying to decipher some worrying signs. Why do gold prices continue to hit historical highs amid a strong dollar?"
Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, pointed out some factors that could drive up the price of precious metals. Hayes wrote about the global total bond yield, stating that the reaction in the gold market indicates "investors are skeptical that high yields will continue."
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Over the past month, the 10-year U.S. Treasury yield has soared from around 3.7% to 4.08%. The U.S. Dollar Index, which tracks the performance of the dollar against the euro, yen, and other currencies, has risen nearly 3% over the past month.
However, Hayes noted that it is expected that U.S. Treasury yields will show a downward trend in the coming year. He added, "Furthermore, the yield spread between the U.S. 10-year and 3-month Treasury bonds has not yet moved out of the 'flat or inverted' pattern, indicating that the bond yield trend has not yet posed a negative impact on gold.
Over the past 20 years, under this pattern, gold has seen an average annual increase of 23%, outperforming other asset classes, all of which occurred as traders anticipated further rate cuts by the Federal Reserve.
The CME Group's FedWatch Tool shows that the market expects a probability of 88% for a 25 basis point rate cut by the Federal Reserve in November, and a probability of 75.6% for a continued 25 basis point rate cut in December.