Bond market rally benefits gold prices

2024-02-21
Summary:

Gold prices surged to a week-high on Wednesday amid a weak dollar. China's rate cuts to support the economy dampen demand for safe-haven assets.

Gold prices climbed to their highest level in more than a week on Wednesday as the dollar remained sluggish. China’s rate cuts in a bid to prop up economy dent investor appetite for safe-haven assets.

The move lower in the dollar has come on the back of a dip in Treasury yields in line with its global peers. The Atlanta Fed’s GDPNow model estimate for real GDP growth in Q1 is 2.9%, signalling a soft-landing scenario.


But investors in interest rate options are paying for trades that benefit from a sharp slowdown in the US economy, contrary to the upbeat outlook held by many bond market participants.


Analysts said they have seen increased demand from hedge funds in the US options market for so-called "receiver swaptions," a type of trade that pays off when interest rates fall.


Citi said gold prices could soar to $3,000 per ounce within the next 12 to 18 months if the de-dollarization leads to a crisis of confidence in the greenback or a deep global recession spur the Fed to cut rates rapidly.


Citi maintains that their base case for bullion is $2,150 in the second half of 2024, and the price to average a little over $2,000 in the first half. A new record could be reached towards the end of 2024, according to the bank.

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Bullion bullish bias is still in place, advancing towards its 50 SMA. On the flip side, we could see the price find some support around $2,000 if sellers gain the upper hand again.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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