Gold Price Bounces Off 3-Month Low: 2 Reasons Why

November 13, 2019 16:35 UTC
  • Gold futures rose by as much as $23 on Wednesday, erasing much of last week’s sharp slide.
  • U.S. government bond yields pare back from three-month highs.
  • Bullion is more attractive to investors following last week’s brutal skid.

The price of gold rallied on Wednesday, as declining bond yields and waning appetite for risk propped up the precious commodity after a volatile two-week skid.

December gold deliveries, the most actively traded futures contract, surged by as much as $23 on Wednesday, reaching a session high of $1,467.60 a troy ounce on the Comex division of the New York Mercantile Exchange. The yellow metal was last seen hovering just below $1,465 a troy ounce, having gained $11.10, or 0.8%.

Gold for December settlement is recovering on Wednesday but remains well off yearly highs. | Chart: barchart.com

A combination of technical trading and declining bond yields largely underpinned gold’s impressive recovery on Wednesday.

Technical Trading

Fresh off its worst weekly slide in three years, gold’s price has appeared more attractive to bottom pickers. The selloff was partially driven by chart-based sellers who turned bearish on the commodity.

The precious metal managed to defend $1,450 – the immediate price floor – after briefly trading below that level last week. Even with the latest recovery, gold is significantly undervalued relative to its yearly high of around $1,570.

Despite the recent wave of volatility, gold continues to be rangebound. As FX Empire notes, the commodity continues to target a primary trading range between $1,412.10 and $1,566.20. Retracement is located between $1,471 and $1,489.20.

Bond Yields Decline

When gold suffered its worst weekly drop in three years, U.S. Treasury yields posted their biggest rally over an identical time span. Now that the benchmark 10-year U.S. Treasury yield is drifting further below 2%, gold is becoming a more attractive investment as a non-yielding asset.

After peaking at 1.97% last week, the 10-year Treasury yield has fallen all the way back to 1.86%. Yields fall as bond prices rise.

U.S. 10-year Treasury yield spiked last week to the highest level since the summer. | Chart: CNBC

Yields are falling as investors pile into government bonds to hedge against geopolitical risks and wavering trade-deal optimism. President Trump and several of his top brass have poured cold water on speculation that a tariff rollback is being eyed as part of an interim trade deal.

Yields, or interest rates on government bonds, play an important role in the commodity markets. Gold’s breakout in 2019 has been largely due to declining real interest rates. Precious metals are likely to remain in a bull market so long as Treasury yields undershoot inflation.

On Wednesday, the Labor Department reported a 0.4% increase in the October consumer price index (CPI), a primary measure of inflation. Expressed annually, the CPI rate increased to 1.8% from 1.7% in September.

So-called core inflation, which strips away volatile prices such as food and energy, came in at 2.3% year-over-year.

This article was edited by Josiah Wilmoth.

Posted in: Market News