(Kitco News) - Gold prices are struggling as persistent inflation pressures drive bond yields higher and force investors to continue to price in a more aggressive Federal Reserve; however, unusually calm equity markets could be providing an important source of support for the precious metal.
In an interview with Kitco News, Joy Yang, Global Head of Index Product Management at MarketVector Indexes, said that despite the recent selling pressure, the gold market remains fairly resilient.
“I think this resistance from gold kind of reflects also the low volatility in the equity markets,” Yang said, noting that the VIX had recently been around 15 even as bond yields surged. “On the surface, it feels like equity investors are a bit complacent and the bond vigilantes are going at it.”
Gold prices are holding initial support above $4,150 an ounce as 10-year yields trade at a fresh 20-year high of 5.26%; meanwhile, the VIX Index is hovering around 17.5 points.
Yang said both equity and gold investors are waiting to see whether elevated inflation proves more persistent and whether the latest oil-price shock will continue. Although equity markets remain relatively calm, she said she suspects some investors are using gold as a hedge against those risks.
She added that strong investment flows into gold and Bitcoin exchange-traded funds show that investors continue to see value in alternative assets even as the opportunity cost of holding non-yielding gold rises.
“We’re seeing some daily flows for September. They’re really strong for both gold and Bitcoin, despite the fact that we’re looking at bond yields going up and potentially heading towards a higher interest rate environment,” she said.
Yang argued that this resilience reflects an important shift in how some investors view gold. Instead of simply competing against bonds on yield, the precious metal is increasingly being held as a structural hedge against broader macroeconomic risks.
Not only are higher bond yields negative for gold, but Yang also pointed out that they add another element to the growing uncertainty, as they increase debt-servicing costs for both corporations and governments.
She noted that equity and bond investors are currently looking at the economic environment through very different lenses. Equity investors remain focused on growth and capital appreciation, while bond investors are increasingly concerned about capital preservation and the immediate cost of higher interest rates.
That divergence could explain why investors remain willing to hold gold even with yields rising.
“You can have equity investors trying to hedge their total portfolio with gold and Bitcoin, and you can have bond investors expressing a kind of high fear and uncertainty,” Yang said.
However, Yang warned that gold is not immune to further selling pressure. She said gold ETF investors could remain particularly sensitive to changing interest rate expectations in the near term.
For now, she said portfolio investors appear to be cautiously hedging and diversifying against growing economic risks rather than outright fleeing equities. But she warned that a genuine market panic would create a different environment. In a broad rush for liquidity, investors could sell gold alongside equities, at least initially.
Despite those short-term risks, Yang said she does not expect gold to return to the substantially lower price levels seen over the past couple of years. Instead, persistent uncertainty surrounding debt, geopolitics, sanctions and supply shocks could keep the precious metal trading within a higher structural range.
“I don’t really see a breakout, but I also don’t see gold falling back to where we were last year or even two years ago,” she said. “I think this is the new band that we’re looking for, because we just don’t know. We don’t have any clarity. If you’re looking at it as a hedge, you’re not really... thinking about the future return of gold and if it’s too expensive at the moment to get in,” she said. “You’re really thinking about the other side of your portfolio. You’re thinking, ‘Can gold be a good structural hedge for my equity position?’”
