Gold Prices +1.1% for Week

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Gold Prices +1.1% for Week Even as Real US Rates Rise Amid Junk Bond Sell-Off, Saudi Tensions

Bullion.Directory precious metals analysis 10 November, 2017
By Adrian Ash
Head of Research at Bullion Vault

Silver held the same weekly gain at $17.02 per ounce, while platinum prices traded 1.7% higher from last Friday above $936.

Crude oil held near this week’s 2-year highs as France’s president Emmanuel Macron made an unscheduled visit to Saudi Arabia, which has now —  amid the “purge” of new crown prince Mohammed Bin Salman’s rivals —  ordered its citizens to leave Lebanon, suggesting an attack against Iran-backed Hezbollah may be imminent.

The Euro touched 1-week highs above $1.1660 on the FX market, cutting gold’s weekly gain for Eurozone investors to 0.9% after it reached the highest price since mid-September on Wednesday at EUR 1110 per ounce.

Betting on next month’s Federal Reserve decision on US interest rates meantime sees zero chance of “no change” — down from a likelihood of 12.2% this time last month — with the consensus continuing to expect a 0.25 point rise in rates to a ceiling of 1.50% on 13 December.

The likelihood of a shock 0.5 percentage point hike however — up to a ceiling of 1.75% — has jumped from zero to 8.5% according to the CME’s FedWatch tool.

“Based on the previous relationship between the price of gold and expectations for US interest rates,” said a report last week from UK consultancy Capital Economics, “the yellow metal is set for a big fall.”

“[But] gold [is currently] ignoring a slight firming in US real 10-year rates,” notes John Reade, chief market strategist at the mining-backed World Gold Council.

“Unusual divergence.”

Adjusting for market-based inflation expectations, 10-year US Treasury bond yields have shown a strong inverse relationship with Dollar gold prices over the last 15 years, reaching a record strong 5-week average of rolling 5-week correlations at -0.963 this time last month.

With 10-year US Treasury yields rising from 2.34% to 2.37% this week, borrowing costs for lowly-rated US corporate borrowers have risen more sharply still, reports the Financial Times.

The price of so-called “junk bonds” fell yesterday to 7-month lows as tracked by trust-fund ETF investment products.

“Looking like JNK was right. Per usual,” said fund manager Jeff Gundlach of $109bn asset managers Doubleline yesterday, answering his own earlier tweet asking how the junk-bond ETF could drop in price 6 days in a row while the S&P500 index of US equities rose 5 times to yet another all-time record high.

“We absolutely do have concerns over Asia junk bonds,” Bloomberg today quotes ANZ Bank credit strategist Owen Gallimore in Singapore, also pointing to the sell-off in sub-investment grade US debt.

“We are underweight Asia high yield as valuations look frothy.”

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