Investors wondering why gold is down three per cent need look no further than U.S. Congress. The ongoing government shutdown and grandstanding has pushed bond prices lower, real yields higher and the bullion price well below $1,300 (U.S.) per ounce.
As the chart shows, when real yields climb the bullion price falls. (I described the reasons for the relationship here; the other common driver of a fall in the gold price is a rise in the U.S. dollar, however the dollar has also recently sunk.) On Tuesday, a completely understandable lack of faith in the U.S. political system caused selling in Treasury markets and a five-basis-point increase in the ten-year bond yield.
The gold price fell more than $40 (U.S.) through the day. This reflects both the change in real yields, and fears that real rates will climb further if the government shutdown continues.
News of a political settlement could occur at any time, possibly without warning, so I wouldn't be inclined to trade on any of this information. However, we can expect the gold price to remain weak as long as the Congressional bickering continues. A sharp rally will likely follow, when the House Republicans exhibit some common sense.
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Scott Barlow