LA Private

Gold vs bonds

Gold bugs celebrated yet another record for the metal on Monday with the price — spot and futures — rising sharply in early trading, before losing puff as US bond yields surged by the most in a month.

Spot gold hit an all-time high of US$2,265.53 per ounce in the early hours of trading on Monday, an increase of 1.6 per cent on Thursday’s closing price, before easing to US$2,248.50 per ounce at the close.

Comex gold futures front month settled at US$2,251.60 an ounce and continued to rise in early Asian trading. That was after they dropped to a session low around US$2,223 an ounce as investors saw the surge in bond yields.

The Australian dollar price on the World Gold Council website was just over US$3,469 an ounce just after 8am Tuesday, Sydney time.

Market analysts claimed gold rose because Friday’s Personal Consumption Expenditure inflation data, while a touch higher than forecast, meant the Fed would be cutting rates sooner than later.

But that report on Good Friday meant the three government measures of US inflation in February — the CPI, PPI and PCE — had revealed that the improvement had slowed, raising questions about when and by how much the Fed cuts this year.

And the dominant story from bonds (and from the slide in the S&P 500 and the Dow) was how investors were, after more than a month, starting to fret that the three rate cuts story won’t happen.

And it wasn’t Friday’s data that prompted that rethink but Monday’s monthly survey of US manufacturing, which showed the first expansion in 16 months in March — a surprise outcome.

The survey showed US manufacturing production rebounded strong to return to expansion with a reading of 50.3, up from February’s weak 47.8. The outcome was well above market forecasts of a 48.3, a mild contraction.

New orders increased last month, although factory employment remained subdued and prices for inputs rose.

Taken with the stronger growth in 4th quarter GDP of 3.4 per cent, continuing low jobless benefit claims and the improvement in inflation slowing in January and February, there’s now more caution about the pace of rate cuts (if any) this year.

That saw US Treasury yields rise with the two-year Treasury bond yield, which reflects interest rate expectations, up 9.4 basis points to 4.714 per cent and the yield on the benchmark 10-year note jumping 13.3 basis points to 4.327 per cent.

That was the highest single session rise in more than a month and means that, if the fretting continues, commodity prices, especially gold, will become increasingly volatile.