More Than Just an Interest Rate Story
We are starting the new week with a strong move in precious metals.
Spot gold is trading around $4,639/oz, up about 0.8%. Silver is at $68.96/oz, once again approaching the $70 level.
Normally, when we try to explain why gold is rising, we first look at two things: the US dollar and bond yields.
When the dollar weakens and bond yields fall, gold usually benefits.
But today, the picture is a little different.
The dollar is slightly stronger.
US bond yields are still high.
And yet, gold is also rising.
So a new question comes up:
Why is gold rising even when interest rates are high?
Because the market is no longer asking only:
“How high are interest rates?”
It is also asking:
“Why are they this high?”
The growing US government debt, large budget deficit and increasing need for financing are attracting more attention from investors.
The fact that the US Treasury may need to support the bond market is also adding to this discussion.
In other words, gold may once again be pricing not only interest-rate expectations, but also confidence in the US fiscal outlook.
Looking at other precious metals, platinum is trading around $1,886/oz, up about 0.5%.
Palladium is around $1,341/oz, slightly lower.
Another important topic this week is the new US sanctions package against Iran.
Washington is preparing broader sanctions that could target not only Iran, but also its trading partners.
Iran, meanwhile, has warned that if economic pressure continues, it could stop oil exports from the Gulf.
If oil prices rise sharply again, there could be two different effects.
Geopolitical risk could support gold.
But higher energy prices could also increase inflation and make it harder for the Fed to cut interest rates.
So once again, oil is a double-edged sword for gold.
The Main Question of the Week
How much further will the US go to keep long-term borrowing costs under control?
The dollar is slightly stronger.
Bond yields are still high.
But gold is rising too.
This tells us that the old rule of “the dollar falls, gold rises” is no longer enough to explain the market.
Gold is going through a period shaped by many different factors, making its direction harder to predict.
It may now be pricing not only interest-rate expectations, but also confidence in US debt and financing policy.