Gold's Resilience Amidst Dollar and Yield Surge: What's Driving Demand?

Gold continues to defy the gravitational pull from rising US Treasury yields and a stronger dollar which gathered further momentum after the US Federal Reserve last week delivered a hawkish pause in their aggressive rate hike campaign. But while the normally strong inverse correlation with dollar and yields have faded, thereby reducing selling pressure from algorithmic focused trading strategies, gold's resilience continues to point to demand from investors seeking a hedge against nervous markets and the rising risk of stagflation hitting the US economy in the coming months.

Key points in this gold note

Gold continues to show resilience despite multiple headwinds from dollar strength to rising yields and lower future rate cut expectations
Support is likely to be driven by a market in search for a hedge against the FOMC failing to deliver a soft, as opposed to a hard landing.
We maintain a patiently bullish view on investment metals as the timing of a fresh push to the upside remains very US ecnomic data dependent.

Gold continues to defy the gravitational pull from rising US Treasury yields and a stronger dollar which gathered further momentum after the US Federal Reserve last week delivered a hawkish pause in their aggressive rate hike campaign, while at the same forecasting considerably higher rates over 2024 and 2025 because of a resilient US economy, a strong labor market and sticky inflation, recently made worse by an OPEC-supported rise in energy prices.

Following the FOMC announcement we have seen the dollar reach a fresh 11-month high against a broad basket of major currencies, while the yield on US 10-year Treasuries has reached a 16-year high above 4.5%. The short-term interest rate futures market has reduced bets on the number of 25 basis-point rate cuts by the end of 2024 to less than three from the current level, with risk of another hike before yearend kept open.

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