Gold News

Gold and Silver's Correlation with Interest Rates Still Broken, Prices Drop with TIPS Yields

GOLD and SILVER prices continued to snap their traditional link with US interest rates on Tuesday, dropping even as the real cost of borrowing fell alongside market expectations for Federal Reserve monetary policy.
With no change expected at next week's Fed meeting from the US central bank's current 2-decade high interest rate, the chances of rate cuts starting in September rose to almost 2-in-3 according to betting on interest rate futures tracked by derivatives exchange the CME's FedWatch tool – the strongest odds in 2 weeks.
Yields on inflation-protected US Treasury bonds meantime fell to the lowest in 2 months, dropping to 2.04% per annum on 10-year TIPS.
But rather than rallying as per the precious metals' historical relationship with real interest rates, gold prices fell $30 per Troy ounce from yesterday's peak near $2355 and silver bullion sank through $30 – an 11-year high when reached in mid-May.
Chart of gold priced in Dollars (inverted, right) vs. 10-year TIPS yield per annum. Source: BullionVault
"[Yesterday's weak] manufacturing ISM data reaffirmed several prevailing economic trends," Bloomberg quotes one private-wealth advisor, looking at May's return to lower activity month-on-month across US factories.
"Decelerating inflation [and] slowing growth...[mean] we should see higher odds of a rate cut later this year priced into interest-rate futures."
With the US Fed due to update its own forecasts at next week's policy meeting, the futures market today put the consensus outlook for end-year rates at 4.95%, down 0.1 points from this time last week.
But as the price of gold today held 5.1% below its new all-time Dollar spot-market high of $2449.99 per Troy ounce, silver traded exactly $3 per ounce below mid-May's near 12-year high of $32.49.
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"The traditional drivers of gold prices have shown substantial changes," says a note from French bank Société Générale, "particularly the relationships with the S&P500, DXY, and real rates.
These drivers now show weakened correlations or disconnection vs gold, but they remain significant nonetheless. [So while] gold prices will still rise if real rates fall and equities crash...the extent of the increase will be challenging to determine due to the emergence of new influential factors."
Central-bank gold demand – "predominantly driven by non-Western aligned nations, which fits with the de-dollarisation theme," says SocGen – last month totalled 33 tonnes net on new data collated by the mining industry's World Gold Council.
"Although gross purchases dipped to 36 from 39 tonnes in March, gross sales saw a more pronounced month-on-month drop from 36 tonnes to just 3 tonnes in April."
Asia's huge retail gold demand – plus what SocGen calls "large bets on rising gold prices by Chinese speculators" – showed signs of easing off today, with the gap between Shanghai and London gold prices sinking by more than $10 per Troy ounce to a 5-session low of $26.
That still offered 3 times the historical average incentive for new imports of gold bullion into the precious metal's No.1 mining, importing, consumer and central-bank buying nation.
Trading volumes on the Shanghai Gold Exchange meantime dropped by 2/5ths from yesterday's 2-week high, while volumes in gold derivatives on the Shanghai Futures Exchange retreated by 1/3rd.
Among global stock markets, China's CSI300 equity index was almost alone in rising again on Tuesday, adding 0.9% from the weekend's 1-month low while European bourses slipped 0.3% and New York opened the day lower.
Late May saw gold's daily correlation with the S&P500 share index – which has averaged 0.0 across the past 10 years – reach its strongest positive relationship since August on a rolling 1-month basis, peaking at 0.83 on the r-coefficient.
Gold's relationship against the Dollar's trade-weighted currency-market index has meantime become highly volatile, swinging by the greatest amount from a negative to a positive correlation since summer 2016, when the UK's Brexit referendum shock was followed by heavy campaigning for Donald Trump's first election as President that fall.
Amid that noise however, the r-coefficient between the DXY and gold priced in Dollars has averaged 0.03 across the last 3 months versus a decade-average of minus 0.43.
That saw the gold price in UK Pounds per ounce retest yesterday's 4-week low beneath £1820 on Tuesday, while the Euro gold price dropped back to €2140 – also a new record high when first reached in early April.
Shanghai silver prices rallied 2.4% overnight from a 2-week low to fix at ¥8060 per kilo, holding the premium above London quotes above $3.80 per Troy ounce.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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