Gold faces new headwind as real yields rise 48 basis points

Key Data	Value
ETF + futures net selling	~1.6 million oz
Q1 ETF demand (YoY)	-78%
Fed rate hike probability (Dec)	58%

Gold fell to a two-month low near $4,527 an ounce even as Brent crude dropped below $100, as rising real interest rates overwhelmed bullion's traditional inflation-hedge appeal.

"The bond markets are thinking that the next rate move by the Federal Reserve is going to be an increase. That's a negative for the gold market here today," Jim Wyckoff, market analyst at American Gold Exchange, said.

US 10-year real yields have repriced 48 basis points year-to-date, Deutsche Bank data shows, with the move accelerating after the US-Iran war pushed Brent crude above $115 a barrel in mid-March. The yield on the 10-year Treasury note rose 21 basis points in the week through May 18 alone, part of a synchronized global bond selloff that saw UK gilts and Japanese government bonds rise 24 and 23 basis points, respectively — a development discussed at the May 18-19 G7 finance ministers meeting.

The 58% probability of a Fed rate hike by December, per market pricing, means gold faces sustained headwinds from higher-for-longer rates. New Fed Chair Kevin Warsh chairs his first Federal Open Market Committee meeting June 17-18, and his views on AI-driven disinflation could shift the rate outlook — a potential trigger for gold ETF demand that slumped 78% year-over-year in the first quarter.

Real Rates Drive the Divergence

The breakdown in gold's traditional relationship with oil reflects a shift in what drives the precious metal. US 10-year real yields now explain 77% of the variation in gold's fair value when measured against forward crude futures, compared with just 51% for near-term contracts, according to Deutsche Bank analyst Michael Hsueh. That means the market is pricing in persistently higher energy costs rather than treating the oil spike as transitory.

The divergence has triggered significant selling. Combined ETF and futures net selling reached about 1.6 million ounces over the past two weeks, with ETF outflows of about 400,000 ounces and futures net selling of about 1.2 million ounces, Deutsche Bank estimates show.

Supply and Demand Diverge

First-quarter demand data shows a market splitting in two directions. Central bank buying exceeded expectations, while bar and coin demand rose 38% from a year earlier. But ETF demand slumped to 62 tonnes, down 78% year-over-year, against Deutsche Bank's full-year assumption of about 450 tonnes.

On the supply side, recycled gold — the most price-sensitive source of new supply — totaled 366 tonnes in the first quarter, with the bank's full-year estimate at 1,470 tonnes. The World Gold Council has said recycling volumes could accelerate in the second half as refinery bottlenecks ease, adding potential downside for prices.

UBS lowered its year-end gold price target by $400 to $5,500 an ounce, citing persistent risks from higher yields and a stronger dollar.

This article is for informational purposes only and does not constitute investment advice.