By: Fawad Razaqzada, Market Analyst
Copper fell around 3 percent, silver around 2 percent and gold around half a percent in a single session, and the reason sat outside the metals complex entirely. The dollar debasement trade that underpinned precious metals has faded, leaving gold, silver and copper to trade off rising bond yields and a rebounding U.S. dollar instead. Rising crude oil has lifted consumer inflation expectations, which has pushed bond yields higher as investors revise what they expect from interest rates. For anyone holding metals as a hedge against currency devaluation, the ground underneath that position has shifted.
Fawad Razaqzada is a Market Analyst for StoneX Media, based in London, with more than 12 years of trading and analysis experience spanning foreign exchange, indices, commodities and cryptocurrencies. He works across the crossover between macroeconomics, technical analysis and price action, which is where the relationship between the U.S. dollar, bond yields and the metals complex actually plays out.
The dollar debasement narrative has stopped setting the price of the U.S. dollar, and that removes one of the more durable supports under gold. As Razaqzada puts it, "it's also becoming clear that the market is putting aside the dollar debasement argument, at least for now", with the currency instead responding to higher bond yields, oil prices and incoming economic data. That change showed up clearly when the Producer Price Index came in hotter than expected, because the U.S. dollar responded positively to it, which is textbook behavior rather than debasement behavior. Notably, the narrative has not disappeared. "That does not mean that the broader dollar debasement narrative has completely disappeared", Razaqzada adds, but a dollar that reacts to data is a very different backdrop for metals than one being sold on a structural story.
Bond yields, not metals fundamentals, are now the dominant input into gold, silver and copper, and the spread between those three shows it. Copper fell hardest and gold fell least, which is the signature of a selloff running through the growth and rates channel rather than the safe haven one. A Treasury operation to buy back long dated government bonds illustrated the same point in reverse, because the U.S. dollar strengthened on an announcement that might have been expected to weaken it. According to Razaqzada, "the reaction in the bond market suggests that investors had been positioned for an even larger operation", and traders unwound the risk premium they had built up around expectations of heavier intervention. Consequently, the macro setup has turned less forgiving for the entire complex, as he noted at the outset, "the broader macro backdrop is becoming increasingly difficult for precious metals".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fawad Razaqzada, StoneX Media Market Analyst
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