Yields on u.s. Treasuries have leaped recently. It will wreck the yellow metal. Or maybe not.

Yields Reach New Heights. Breakthrough for Gold?

Last week, we wrote that concerns emerged that China could stop or slow buying the U.S. Treasuries. The U.S. bond yields reacted strongly. We noted that in theory it should sink gold, but the usual “correlation between bullion and Treasury yields broke down thanks to the depreciation of the u.s. dollar, which supported the gold prices”. Due to the importance of that issue for the gold outlook, we continued to monitor the developments in the bond market to keep investors updated.

Let's look at the chart below. It shows that yields on 2-year U.S. Treasuries jumped on Tuesday to 2.03 percent, the highest level since 2008. And one can also see that 10-year Treasury yields hit 2.54 percent, the highest level since the beginning of 2017.

Chart 1: The price of gold (yellow line, left axis, London P.M. Fix, in $), the yields on 10-year Treasuries (red line, right axis, in %), and the yields on 10-year Treasuries (green line, right axis, in %) over the last ten years.

Many analysts assert that soaring yields will scupper the golden ship. But the price of the yellow metal rallied last week. It dropped slightly on Tuesday, but it rose again yesterday. Anyway, gold doesn't look as casualty of rising yields. At least so far. Why?

Real, not Nominal, Rates Matter for Gold

One of the reasons behind the counterintuitive gold's reaction is that real interest rates didn't soared. Of course, they also jumped, but remained within the trading range seen since 2017, as one can see in the chart below.

Chart 2: The price of gold (yellow line, left axis, London P.M. Fix, in $) and the U.S. real yields (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security, in %) over the last five years.