This is an excerpt from the Q4-2023 gold and silver outlook. For a detailed discussion on precious metals download DailyFX's fourth quarter trading guide. It's free!
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Real yields remain a key driver
Waning demand for the yellow metal amid rising real rates and a stronger US dollar have continued to undermine gold. The scenario seems unlikely to change until the year end.
US real rates (policy rate minus the year-on-year change in inflation) have turned positive after remaining negative for years. Rising nominal interest rates coupled with easing price pressures/inflation expectations have pushed up real rates, raising the opportunity cost of holding the zero-yielding yellow metal. With inflation remaining stubbornly high, global central banks have signaled higher-for-longer interest rates.
US 10-Year Treasury Inflation Protected Securities’ Yield & Central Banks’ Demand
![image1.png](https://a.c-dn.net/b/45npt2/image1.png)
Source Data: Bloomberg; Chart prepared in Microsoft Excel
At its meeting late September, the US Federal Reserve left the door open for one more rate hike and indicated fewer cuts next year than previously projected. A day after the Fed, the Bank of England Governor Andrew Bailey said that the central bank will need to keep interest rates high for a longer period, while the European Central Bank President Christine Lagarde didn’t rule out the possibility of further rate hikes at its meeting in September.
Investors’ Appetite For Gold
![image2.png](https://a.c-dn.net/b/27mfX1/image2.png)
Source Data: Bloomberg; Chart prepared in Microsoft Excel
Shrinking investor appetite soft landing view gains traction
As a result, demand for gold has shrunk in recent months. Gold purchases by global central banks have slumped this year after hitting a multi-year high last year. Investors’ demand, including purchases by exchange traded funds, money managers, and speculative buying, has weakened in recent months. Possible explanations for the shrinking appetite include growing concerns that global interest rates will remain higher for longer, a solidifying view that the US economy will avoid a hard landing.
Risks
Potential risks that could negate the bearish outlook for gold and trigger safe-haven buying include a pick up in market volatility and/or flare up in geopolitical tensions.
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