Article / 10 January 2018 at 10:54 GMT

Gold consolidating with eyes on JPY and US yields

Head of Commodity Strategy / Saxo Bank
  • Gold consolidating December gains
  • Speculation that BoJ could be poised to shift to tapering boosts yen
  • US 10-year treasury yield popped to 2.55% yesterday, highest since March
  • Large supply of bonds hitting market amid signs bond market bull run could end
  • Unlikely break below $1,270/oz would be needed to derail gold's new strength 
Gold and yen
 The Japanese yen is an important driver of gold. Image: Shutterstock

By Ole Hansen

Gold has spent the past week consolidating the strong gains scored during the second half of December. The potential negative impact of rising US bond yields and China trying to orchestrate a stronger dollar has so far been cushioned by a stronger yen on speculation that the Bank of Japan could soon shift policy to tapering.

The yield on US 10-year treasuries reached 2.55% yesterday, the highest since March. A major supply of bonds from the US, the UK, Japan and Germany is hitting the market at a time when concerns are being raised that the bull market in bonds, which has lasted for more than 25 years, could be coming to an end. Overall, however, real yields, an important driver for gold, remain range-bound, with rising US nominal yields being offset by rising inflation expectations, as shown by the breakeven yield in the below chart.

US 10-year yields
The Japanese yen, another important driver for gold, has managed to move higher despite some emerging dollar short-covering against other major currencies. The Bank of Japan's decision on Tuesday to trim its regular purchases of longer-dated bonds helped trigger speculation that this could be an early sign of a shift toward policy normalisation by the BoJ. The yen has been and remains the most shorted of the major currency futures, according  to weekly data from the US CFTC. Hence the risk of a sharp recovery if tapering speculation increases further. 

Gold and JPY correlation

In the week to January 2, hedge funds had reinstated 60% of the record amount they sold during the first two weeks of December ahead of rate hike and tax reform announcements. An emerging bullish sentiment for gold  — given raised inflation expectations and the risk of a correction hitting bonds and stocks  — is likely to continue to attract fresh buying from investors and funds seeking tail-end protection.

Speculative positioning in COMEX Gold futures

We maintain a bullish outlook for gold into these early stages of 2018. After a $90 rally from the December 12 low, a correction and subsequent rejection to the downside is probably what the market needs to create the confidence required to push the price higher. In the short term, a correction below $1,300/oz, but no lower than $1,292/oz, would be viewed as a weak correction within a strong uptrend. An unlikely break below $1,270/oz would be needed to derail gold's newfound strength.  
Spot gold with retracement levels
Source: Saxo Bank
 — Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
Fast moving markets today with gold now popping higher on this news from Bloomberg: "Officials reviewing China’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasuries, according to people familiar with the matter"
This is a big move- especially in USDJPY. Strong risk of generalized risk off as US treasury yields broke higher already yesterday.


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