The Dual Pressure on Gold: Thin Liquidity and Unyielding Rates
JPMorgan Private Bank's Asia head of rates and FX strategy, Yuxuan Tang, recently highlighted ongoing challenges for gold. The precious metal continues to face headwinds from two primary sources: persistently thin market liquidity and the prospect of further interest rate increases. Together, these factors suggest that downside risks remain even after recent sell-offs.
The Rate Path: Dictating Gold's Floor
The bank's outlook anticipates the Federal Reserve could hike rates in December and again in the first quarter of next year. This trajectory is expected to push the 10-year U.S. Treasury yield to a peak between 5.25% and 5.5% by mid-2024, up from its current level just above 5%. Higher yields directly undermine the appeal of non-yielding assets like gold, as investors pivot toward better-paying alternatives. Tang emphasized that a firm bottom for gold will likely only materialize once the Fed's tightening cycle conclusively ends.
A Vulnerable Market with a Potential Rebound Ahead
Technically, the gold market appears "quite vulnerable." Tang noted that below the $4,000 per ounce level, there is little substantial technical support. Compounding the difficulty is the shifting market expectation for the peak in yields—both higher and potentially later—making it tough to pinpoint an exact bottom.
Nevertheless, a turnaround is projected. Once the Fed's rate hikes conclude, gold's enduring role as a hedge against economic and policy risks should restore its appeal. This could pave the way for a strong rebound in the latter part of next year. The end of the tightening cycle may well mark the beginning of gold's next sustained upward move.