Gold trading reminder: U.S. Treasury yields have soared and hit gold prices, and the market outlook is likely to fall but hard to rise

On Friday (September 24) Asian time, spot gold price rose slightly, trading around 1748. On Thursday (September 23), the price of gold once again ushered in a sharp drop, affected by rising U.S. bond yields and investors' preference for high-risk assets, as investors continued to prepare for the Fed to raise interest rates earlier than expected. In addition, the rise in global stock markets has also put pressure on safe-haven assets. However, the weakness of US economic data and the fall of the dollar have limited the decline of gold prices.

Pay attention to the US August new home sales data after the seasonal adjustment.

Fundamentals are bad

[Long-term U.S. Treasury yields hit the largest increase in 18 months]

US long-term Treasury yields hit the largest increase in 18 months. After the Fed’s hawkish policy statement was released, traders moved forward their expected first rate hike to the end of 2022.

As of noon in New York time, the 30-year Treasury bond yield rose by 11 basis points to 1.92%, the highest increase since the outbreak of the epidemic in March 2020. The federal funds rate futures contract that expires in December 2022 has risen about 5 basis points to 0.28% in the past two days, indicating that the market expects that the US will raise interest rates by 25 basis points by then 100%. Before the release of the latest monetary policy statement, investors had expected the Fed to raise interest rates from early 2023. The overnight index swap contract shows that the probability of an interest rate hike before September 2022 is close to 50%.

After Wednesday's Fed meeting, traders raised their bets on interest rate hikes. Powell said the Fed may begin to reduce asset purchases in November and complete it by mid-2022. The new quarterly forecast on the dot plot also supports this view. Nine out of 18 officials expect to raise interest rates next year, more than seven in June. The median forecast shows that the federal funds rate may rise to 1% in 2023 and 1.75% in 2024.

Rising U.S. Treasury yields will take a toll on non-interest-bearing gold.

[Fed reverse repurchase usage has hit a record high this week]

After the Fed raised its counterparty trading limit and hinted that it was about to shrink the scale of asset purchases, investors' use of the Fed's reverse repurchase tool continued to hit record highs.

The Fed's overnight reverse repurchase operation on Thursday involved 77 counterparties, with a total of $1.352 trillion in cash deposited by the Fed. New York Fed data shows that this set a record high of $1.28 trillion on Wednesday.

This week, the Fed raised the upper limit for each counterparty to use the tool to deposit cash with the Fed from US$80 billion to US$160 billion , after which the market's demand for reverse repurchase further increased. Due to the Fed's purchase of assets and the Treasury Department's consumption of cash balances, the US dollar fund market continues to flood, resulting in the overall increase in the Fed's reverse repurchase transaction volume this week.

Even if the Fed starts to reduce the scale of asset purchases, the move to increase the upper limit of transaction volume will continue to support the capital market, because the imbalance between supply and demand of short-term securities may continue.

Securities strategists at JPMorgan Chase said that assuming the Fed ends asset purchases in 2022, this will mean that the Fed will also inject more than $400 billion in liquidity into the financial system.

[The three major indexes closed up by more than 1%, and the market felt relieved that the Fed's stance on reducing debt purchases and raising interest rates]

The US stock market rose by more than 1% on Thursday, and investors seemed relieved by the Fed’s stance of reducing stimulus measures and raising interest rates.

The Dow rose 1.48%, the S&P 500 rose 1.21%, and the Nasdaq rose 1.04%.

(Dow daily chart)

The U.S. Food and Drug Administration (FDA) later on Wednesday approved Pfizer's new crown vaccine booster for people 65 years and older.

The Fed said on Wednesday that it may start to reduce its monthly bond purchases as early as November, and it will start raising interest rates next year, which is earlier than market expectations. The reduction in bond purchases started in November has largely been digested by the market.

Investors ignored the data showing sluggish growth in corporate activity and the increase in initial jobless claims, which are in line with expectations of a slowdown in economic growth in the third quarter.

[September 23 gold ETF holdings: SPDR gold holdings decreased by 8.14 tons]

As of September 23, the world's largest gold ETF-SPDR Gold Trust held 992.65 tons of gold, a decrease of 8.14 tons from the previous trading day, and the number of reductions was the largest since March 5.

Fundamentals are bullish

[The number of people applying for unemployment benefits for the first time in the United States unexpectedly rises for the second consecutive week]

The number of people applying for unemployment benefits for the first time in the United States unexpectedly increased last week. Among them, the number of applicants from California increased sharply, showing signs of fluctuations in data this week, while the labor market continues to recover in an all-round way.

Data released by the Labor Department on Thursday showed that in the week ending September 18, the number of first-time jobless claims rose to 351,000, and the median estimate of survey economists was reduced to 320,000.

As of the week of September 11, the number of people who continued to apply for unemployment benefits increased to 2.8 million.

The increase in the number of applicants for unemployment benefits reflects the volatility of this week's data. During the economic recovery, the data has generally declined.

Looking ahead, with the stimulus spending falling, economic growth is expected to slow in the third quarter. Employers in various industries revealed that the end of federal supplementary unemployment benefits has not yet led to an increase in job applications.

[U.S. service industry and manufacturing activity growth rate fell to the lowest level in a year in September]

Affected by the supply chain, labor market, and delta strain, the US service industry and manufacturing activity indicators in September hit their lowest levels in the next year.

According to IHS Markit, the comprehensive purchasing managers' index fell to 54.5 from 55.4 a month ago . A reading above 50 indicates economic growth, which has been declining month by month since it hit a record high of 68.7 in May.

Chris Williamson, chief business economist at IHS Markit, said in a statement: “The slowdown is caused by the cooling demand in the service industry, and partly related to the spread of the delta strain. Although manufacturers see demand resilience, factories are supplying. There are more and more problems facing the chain and manpower."

The situation is similar in the Eurozone, where the business activities of service providers and manufacturers have fallen to a five-month low, with the slowdown in Germany and France being particularly pronounced.

IHS Markit's U.S. service industry activity indicator fell to the lowest level since July last year . With continued recruitment difficulties and limited demand, the number of employment in this industry has declined for the first time since June last year.

The manufacturing PMI fell to a five-month low . Although still at a relatively high level of 60.5, output indicators have fallen to their lowest level since October last year, and order growth has slowed.

[The U.S. dollar hits the largest single-day percentage drop in a month]

The U.S. dollar fell across the board on Thursday, as risk sentiment in the global financial market improved and gave up the gains of the previous trading day. The Fed previously hinted at plans to reduce stimulus measures this year.

(Daily chart of the US dollar index)

Scotiabank’s chief foreign exchange strategist, Shaun Osborne, said in the report, “Commodity currencies generally rose, safe-haven currencies weakened, and the U.S. dollar fell generally. It closed higher after the Federal Open Market Committee (FOMC) meeting yesterday.”

Data show that the number of initial jobless claims in the United States unexpectedly increased last week. Due to the surge in California applications, the US dollar received almost no support from the data.

The improvement in risk appetite is reflected in the trend of major US stock indexes. The S&P 500 index is expected to record a gain of more than 1%, the largest two-day percentage gain since the end of July.

The Fed said on Wednesday that it may start to reduce the size of its monthly bond purchases as early as November, and hinted that it may raise interest rates earlier than expected.

On the whole, the weakness of gold prices has been fully exposed, and the market outlook is easy to fall but hard to rise. However, there are opportunities for rebound correction in the short-term, and the overall price of gold is still bearish.

(Spot gold daily chart)

GMT+8 8:43, spot gold was quoted at US$1,748.33 per ounce.