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Unusual correlation of Gold and US Treasury Yield raises concerns

Unusual correlation of Gold and US Treasury Yield raises concerns

The ascent of gold prices continues to move from strength to strength, driven by factors such as geopolitical tensions, prompting investors to tap into the metal’s safe-haven allure amid the prevailing fear of missing out (FOMO). 

Nevertheless, this gold value surge has begun to alter its relationship with other assets, notably United States 10-year Treasury yields. Recent data from financial news aggregator Zerohedge suggests a departure from the historical correlation between gold and Treasury yields towards a more divergent pattern in recent years.

Even as gold prices soar to new heights, surpassing the $2,400 mark, Treasury yields have recorded a sharp downward trajectory, displaying unusually significant divergence from the historical path.

Spot gold price vs Treasury Yield chart. Source: Zerohedge.

Understanding the divergence 

Gold usually has an inverse correlation with products such as Treasury yields. When yields on US Treasury bonds increase, gold prices tend to decrease, and vice versa. Nevertheless, recent market dynamics have challenged this close correlation. 

Currently, gold has mainly been influenced by interest rate expectations, with the commodity hitting new heights as the market anticipates the Federal Reserve will execute rate cuts. Gold also finds support in the escalated tensions in the Middle East, serving as a key primary catalyst for its recent surge.

Consequently, gold prices and 10-year US Treasury yields have diverged, leaving investors unsure about the state of the economy and the future of financial markets.

Even though increasing gold prices might indicate persistent fears over inflationary pressures and geopolitical risks, declining bond yields suggest a more cautious attitude toward economic growth and inflation expectations.

Notably, the performance of Treasury yields is determined by the market perception of economic health. When there are good commercial prospects, a high yield is expected, while investors are interested in taking high bets that could diminish gold prices. 

On the contrary, during an economic crisis, investors usually buy government bonds because they are safe, driving up demand for gold, hence its increased value.

Thus, market participants will be watching how the gold and US treasury yield divergence plays out, as any further changes could mean inflated risk and troubles for financial markets.

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