Drop in Yields Moves Gold Higher

PRECIOUS METALS

Gold: December gold contracts rose nearly 1% to $4,196 as a drop in the dollar and global yields led to more favorable buying conditions. The FX market remains focused on European fiscal stress, particularly in France, despite the recent repricing of an October rate hike for the Fed. Still, the market is priced for a rate hike in December, and Monday’s services report showed still-strong activity, strong domestic demand, and elevated input prices. That combination argues for a restrictive Fed and higher Treasury yields, which should keep the dollar support. Meanwhile, the greenback’s role as a defensive currency amid the absence of an attractive large-currency alternative is also dollar positive. For the Fed, September’s report, weak hiring, downward revisions, yet stable unemployment, labor utilization, and participation, argue against interpreting the data as evidence of a sharp deterioration in labor demand. Other labor data have shown no signs of a broad increase in layoffs. Mainly for the US, the rise in yields represents a substantial repricing in Fed rates expectations and strong expectations for economic growth. Recent survey evidence has continued to support the idea that economic growth remains robust, which gives ample reason to expect yields will move modestly higher over the next couple of months following their rapid rise recently. These dynamics are likely to contribute to a challenging environment for gold over the coming months.

Focus now centers around minutes of September’s Fed meeting, which is likely to help shape expectations around future monetary policy. The market is pricing an 22% probability of a Fed rate hike in October, though remains fully priced for a move higher in December.

Silver: December contracts are up 0.74% to $61.75.

BASE METALS

Copper: Copper prices rose on the LME and fell on the COMEX. LME copper was 0.1% at $14,420 and US prices fell 0.14% to $6.63. Today, copper is drawing support from a drop in the dollar, global yields, and a rally in the equity market. Regardless, stronger support has resulted from potential workers strikes; workers at Antofagasta’s Centinela copper mine are set to strike on October 13 if no agreement is reached in the meantime. Meanwhile, supervisors at BHP’s Escondida copper mine in Chile, the world’s largest, have also rejected a contract offer. China is also in the midst of a week-long holiday, which has limited a key demand signal for copper, offering the question of whether or not recent gains will hold when Chinese traders reenter the market.

For copper, stronger resistance from higher oil prices is starting to be felt. Higher oil prices are once again reigniting worries over potential hits to demand, creating a cautious tone. Meanwhile, signs of industrial weakness in China and an absence of a Chinese bid due to holiday are offering resistance to the upside. Recent factory activity data from China showed a modest recovery in growth, although future conditions are likely to be scrutinized for domestic demand signals. Heavy reliance on exports for the industrial sector raises risks to the outlook for copper as geopolitical uncertainty and rising trade frictions play a more dominant role.

Zinc: Zinc climbed 0.6% to $3,765.

Aluminum: Aluminum gained 0.7% to $3,148.

Tin: Tin rose 0.1% to $54,390.

Lead: Lead added 0.1% to $1,878.

Nickel: Nickel lost 0.1% to $15,700.

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