GOLD STEADY IN BOND CAOS / MACLEOD FINANCE

Gold steady in bond chaos

It’s the best of times for gold; the worst of times for dollars. Led by long-dated JGBs, global government bond markets are wobbling. We can see where this is going…

Alasdair Macleod

This week saw moderately firmer prices for gold and silver following a near-four-week consolidation. 

In European trade this morning, gold was $3328, up $27 from last Friday’s close. 

And silver was $33.20, up 93 cents. 

Futures volumes on Comex remained low-to-moderate, though picking up slightly as the week progressed.

It is worth bearing in mind that measured by open interest, both contracts are still in oversold territory, a technical positive factor limiting the ability of the swaps to shake out longs:

Traders and stackers alike will be wondering whether the consolidation timed from 22 April is over. 

While gold’s bullish outlook is undoubted, a look at the technical chart is not clear.

While support at the 55-day moving average has held, it could be argued that more time for the 12-month MA to catch up would provide a better platform for gold to climb towards $4000. 

But with gold’s Comex open interest low, does this really matter?

Probably not, given that this week has seen a developing crisis in government bond markets, with long-dated JGB yields soaring:

It matters because of the signal being sent about the future of the second largest debt market in the world and its short-term interest rates, and also because the yen carry-trade plays a major part in funding US government debt. Contagion into US Treasuries is pretty much certain.

Additionally, this was the week when the US House of Representatives passed Trump’s “big, beautiful spending bill” adding trillions of debt which has to be funded with foreign investors acting as the marginal players. 

With his tariff policies, Trump has almost certainly alienated this cohort, making funding more difficult. 

And so far, market consensus over the economic outlook is probably too optimistic: a recession is almost certain blowing budget deficit estimates out of the water. 

And the implications for dollar interest rates are that they could rise rather than fall.

The long bond chart appears to confirm this danger:

It will take very little to drive the long bond yield to 20-year highs above 5.2%, and a crisis in JGBs doesn’t help.

Monday is Memorial Day in the US, so its markets will be closed, thinning out trade and making them less predictable. 

Will this be an opportunity for the Japanese and US governments to collude in a bond market support operation? 

It would be wrong to rule it out. 

But looking through next week, we can see the consequences of alienating foreigners from US debt markets in the next chart:

Before 2 April when Trump announced his new tariffs, the US$ trade-weighted index correlated nicely with the 10-year UST-note yield, as one would expect. 

That date is marked by the pecked line. 

From then on, the correlation broke down with the dollar collapsing and the T-bond yield soaring. 

There has been no clearer indication of the loss of foreign confidence in the dollar and US debt.

We have looked at the prospect for higher bond yields and concluded that despite possible government intervention next week while the US is on holiday, they are going higher. 

The blue line in the chart above is almost certainly heading to over 5%. 

Now we shall look at the chart for the TWI:

Ouch! 

This one is heading significantly lower. 

So, the bond crisis is also a dollar crisis likely to develop over the next few weeks. 

It answers the question posed earlier in this article about whether gold spends more time consolidating before going higher. 

Other than the manipulation over Comex contract expiry next week, it is hard to see any reason why gold should not go considerably higher sooner rather than later.