The markets are currently experiencing a “sell everything” sentiment, except for oil, due to a statement by Federal Reserve dove Neel Kashkari. Kashkari mentioned that there is a 40% chance that the Fed hiking cycle will not be over this year and that rates may need to increase significantly to control consumer spending and bring inflation back to target. This news has raised concerns in the market and has impacted safe haven assets like gold, which is facing tough competition from bonds.
In the safe haven space, gold is struggling against bonds as US 2s were sold for above 5% in an auction, while 10-year notes yield 4.56%. Gold continues to yield zero, and with a widening of the spread, especially in a risk-averse scenario, gold becomes a less favorable option. However, there are still some factors supporting gold, such as BRICS and countries unfriendly to the US buying gold, the weakness of the yuan making it attractive in China, and its relatively high position against other currencies.
Despite these tailwinds, against the US dollar, gold has been experiencing a downtrend with a fourth lower high. If it falls below $1900, it would mark a one-month low, but the critical level to watch is $1884. If it drops below that, there is not much support until the low $1800s. The timing of a potential turnaround for gold is uncertain, but historically, gold tends to rally starting in November. Therefore, patience might be the better strategy for now.
Overall, there is a demand for safe havens, with $16 billion pouring into the TLT long-term bond ETF this year. Eventually, falling rates will likely affect gold as well, but we have not reached that point yet.