Just as the New Year party champagne bubbles are going flat, traders are waking up to the sober reality that 2022 is coming with a bang. With US Treasuries selling off, a sharp rise in US bond yields is impacting major markets. In the commodities space, despite the risk aversion, precious metals are still not able to avoid the selling pressure. 

  • Rising yields are negative for precious metals
  • If this continues, gold and silver will remain under pressure

FOMC balance sheet reduction

The early sessions of 2022 have seen US bond yields moving sharply higher. This was exacerbated following the release of the minutes from the FOMC’s December meeting yesterday. The minutes talked of a sooner than expected reduction in the Fed’s balance sheet.

As of the end of December 2021, the Fed had $8.3 trillion of assets on its balance sheet including $5.6 trillion of Treasuries and $2.6 trillion of mortgage-backed securities. It can reduce this size in two ways, selling securities or by choosing not to reinvest maturing securities. 

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According to the minutes, it appears that this will likely be reduced “relatively soon” following the increase in interest rates. With the taper of asset purchases to be done by February, and the increased potential for a March rate hike, suddenly the Fed could be a whole lot more hawkish.

This is driving traders to sell US Treasuries, spiking bond yields higher.

Rising yields are negative for precious metals

We can see the rise in the US 10 year yield, from around 1.50% around Christmas, to now over 1.70%. The next barrier for the yield is at 1.776, the March 2021 post-pandemic high. A break above here would open 2%.

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We can also see that with inflation expectations barely moving, this has caused a big spike up in the “real” bond yield (bond yields accounting for inflation). The 10-year real yield is suddenly at -0.81% which is a six month high.

However, in the chart below, we also show that rising real yields are negative for gold. There is a strong negative correlation between the two. The fall in gold has not been too severe (yet) but if real yields continue to climb, this will continue to weigh gold down.

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We also see a similar negative correlation between real yields and silver. The silver price is though reacting sharply lower to the spike in bond yields. Silver is considered to be less of a safe haven (and is far more volatile than gold) as it is also considered to be an industrial metal. The sharp rise in bond yields is also driving risk aversion, with flow out of higher risk assets. Silver is being caught up in this.

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Technical Analysis on Gold and Silver

However, if we look at the technical analysis, we see that on a relative basis, gold is holding up much better than silver. The outlook for silver is deteriorating, whilst for gold, we are still waiting for a confirmed negative move.

For Gold (MT5 code: XAUUSD) we have seen some very choppy moves in recent sessions. It has only been in the past 24 hours that the negative impact of the rising bond yields has impacted gold. 

We believe that $1800 should be seen as a gauge for gold. Once more an intraday move below $1800 has found buyers this morning. This helps to maintain what has been an improvement in the outlook over the past couple of weeks. 

However, this $1800 level is sure to come under further scrutiny if US bond yields continue to climb higher. If the price is consistently below $1800 it would open a test of $1785 support and potentially back towards $1750/$1760. 

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The outlook for Silver (MT5 code: XAGUSD) is under far more negative downside threat. This morning’s sharp downside break below $22.50/$22.70 support has changed what had previously been a recovery outlook into one at risk of sharp deterioration. Momentum on the RSI is now corrective, but also with downside potential. 

The old $22.50/$22.70 support now becomes a basis of resistance and a potential sell zone. There has been a tick higher from the support around $22.12/$22.17 but with intraday rallies now seen as a chance to sell, this could quickly come under threat again. This would certainly be the case if US bond yields continue to climb. A close below $22.12 opens the crucial support at $21.40.

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