By Geoffrey Smith
Investing.com -- Gold prices retraced on Wednesday after posting their largest one-day gain in a decade on Tuesday on a flood of new bets on a future of low or negative returns on alternative-haven assets.
By 12:10 PM ET (1610 GMT), Gold Futures for delivery on the Comex exchange were down 1.9% at $1,629.90 a troy ounce, while spot gold was down 0.4% at $1,610.88.
As such, the wide spread between futures and spot market that opened up earlier this week had largely closed.
A shortage of gold for settlement under Comex rules had led to the contract trading up to $40 above the spot product. However, CME Group (NASDAQ:CME) and the London Bullion Market Association moved late on Tuesday to address the problem by ensuring that the LBMA’s 400-ounce bars would also be acceptable for settling Comex contracts.
Analysts at BMO Capital Markets said the episode was short-term dislocation rather than anything structural.
However, the bottom line is that the episode didn’t arise out of a lack of demand for gold, which continues to attract heavy interest from portfolio investors as the unjamming of bond markets by central banks leads to sharp falls in haven yields. The 10-Year Treasury yield has fallen from 1.27% to 0.81% in less than a week, while ultra-safe three-month T-bill yields turned negative in early trading on Wednesday.
“The long-term implications of ballooning budget deficits, negative real rates, and debasement of currencies should support gold in future,” World Gold Council's David Tait said in e-mailed comments.
Haven assets are bracing for what should be the biggest data release of the week on Thursday, the announcement of U.S. initial jobless claims for last week. Most forecasts predict an all-time high of over 2 million, reflecting the collapse in demand for most non-essential services. Markit purchasing manager indices released on Tuesday showed that services, which account for the lion’s share of employment, weakened much more sharply than manufacturing as the Covid-19 pandemic exploded.
That underlines the importance of income support measures for workers in the stimulus package currently going through Congress, inasmuch as they represent the best – perhaps the only – defense against the start of a deflationary spiral.
Capital Economics analyst Alexander Kozul-Wright argued in a note to clients on Wednesday that deflation is perhaps the biggest threat to gold prices right now. He kept his year-end forecast unchanged at $1,600.
Elsewhere in metals markets Wednesday, silver futures rose 2.3% to $14.59 an ounce, while the shutdown of South African mines helped palladium futures to another 20% rise, and platinum futures to a gain of 2.7% to $721.50 an ounce.