Gold Finally Melts as Bond Yields Surge to 22-Year High. Now What?
Gold Finally Melts as Bond Yields Surge to 22-Year High. Now What?
By:Ilya Spivak
Gold and silver tumbled in a burst of sudden recognition that Treasury bond yields are at 22-year highs. As traders ask, “why now?” a heavy dose of economic data looms ahead.
- Gold suffered the biggest drop in almost four months, erasing nearly all of rise from July lows, and silver crashed through a two-month range floor
- Long-term Treasury yields are at the highest in 22 years, with traders betting on twice as many rate hikes through 2027 as the Fed expects
- ISM manufacturing PMI and the US jobs report will test whether hawkish repricing has more room to run
The metals blinked. After spending last week holding their ground while yields surged around them, gold and silver took an aggressive tumble to open the week. Gold has now retraced almost the entire rise it built from the lows in July and August. Silver fared worse, slicing through the lows that had anchored its range for two months.
Elsewhere the damage was modest. The bellwether S&P 500 slipped 0.73% and the tech-heavy Nasdaq 100 fell just over 1% but neither index managed to leave its near-term range. The US dollar notably declined to extend its recent rally.
Metals were slow to succumb, but surging yields won out
The pressure itself is not new. A hawkish turn from the Federal Reserve, rising crude oil prices, and a seemingly red-hot US economy have combined into a relentless climb in borrowing costs, sending the 30-year Treasury yield to its highest in 22 years. What stands out is the order in which markets have responded.
Fed Chair Kevin Warsh marked the start of hawkish repricing at the front of end of the yield curve with a boisterous speech at the annual Jackson Hole symposium in late August. The US dollar dutifully strengthened while the bits of the stock market unable to surf the AI hype wave suffered. The Russell 2000 index of small-cap stocks and the Invesco S&P 500 Equal Weight ETF (RSP) fell tellingly in tandem.
Until this week, gold and silver looked resilient as yields pushed higher. Crude oil turned lower mid-September, pulling down breakeven inflation rates priced into five- and ten-year Treasury bonds along the way. That seemed to keep precious metals afloat even as yields rose. Their luck may have finally run out.
Last week the market looked split between assets repricing for a more aggressive Fed and a group of dollar alternatives refusing to join them. This week suggests that divergence may be starting to resolve, and the metals are the side giving ground.
A heavy duty batch of US data looms ahead
Fed funds futures now put the probability of seeing the next rate hike in October rate at about 70%. By December, its arrival is seen as a foregone conclusion. The markets then see at least two more hikes in 2027, although the Fed’s own projections have rates peaking in 2026 and stalling next year.
Recent data have sided with the markets. The Atlanta Fed’s GDPNow model guesstimating third-quarter growth has been climbing since mid-August, and the Citigroup economic surprise index has rebounded in recent weeks as releases topped projections. Last week’s explosively strong S&P Global PMI data is the latest case in point.
The week’s calendar is back-loaded. The personal consumption expenditures (PCE) price index arrives Wednesday, though it rarely surprises much after CPI and PPI inflation data are known. The real tests come Thursday with the manufacturing PMI survey from the Institute for Supply Management (ISM) and Friday with September’s US jobs report.
The ISM data is expected to show a pickup in activity growth while the employment numbers are seen bringing an increase of 84,000 jobs – a downshift after August’s 162,000 – and a rise with unemployment rate to 4.2%. Another batch of unexpectedly strong figures may test whether yields have still more room to climb.
Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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