CIO will look for confirmation from here of a peak in US real yields before adding new recommendations. (UBS)

Yields are still up this week and are around 60 basis points higher than at the start of September. This sharp move has been contributing to volatility in other markets.


Gold has lost USD 100 an ounce to USD 1,8207oz, its lowest level since March, as more attractive yields on government bonds have added to the opportunity cost of holding the metal. The US dollar, meanwhile, has benefited from expectations that the Federal Reserve will keep rates higher for longer, hitting a 2023 high earlier this week. Oil markets have also been volatile, with a 5.6% decline to USD 85.81 a barrel on Wednesday—its largest one-day decline in over a year—after data pointed to weaker-than-expected demand for gasoline in the US.


We believe the moves have a range of implications for investors:


Shifts in the foreign exchange markets are adding to opportunities for investors. The US dollar, which made a weak start to the third quarter amid hopes of an imminent end to Fed rate hikes, has rebounded swiftly, rising around 7% from a low point in mid-July. The dollar’s ascent has pushed the yen to structural low levels—with Japan’s currency weakening below 150 for the first time since last October before market rumors of Bank of Japan intervention halted the decline. The Australian dollar and Norwegian Krone have also come under heavy pressure. Against this backdrop we favor selling upside risk for the euro, the Swiss franc, or the British pound, against structurally weak currencies like the Japanese yen, Australian dollar, and Norwegian krone.


The recent retreat in oil offers a renewed entry point for investors that have no exposure. In our view, the determination of OPEC+ oil exporting nations to constrain supply should support prices. Meanwhile, global oil demand stands at a record 103 million barrels a day, having benefited from the reopening in China and solid demand growth in India. Looking into next year, we expect demand to continue rising, though the pace of this rise is likely to normalize toward the long-term growth rate of around 1.2mbpd. As a result, we still expect oil to end the year at USD 95 a barrel.


Risk-taking investors can consider adding long exposure via longer-dated Brent contracts where prices are cheaper than spot and should eventually close higher, and may also consider selling Brent’s downside price risks. Investors prepared to tolerate a higher level of volatility may consider shorter-dated futures contracts to take advantage of the downward-sloping futures curve. We remain most preferred on the energy sector within equities, and specifically in the US, where the energy sector appears attractively valued based on free cash flow metrics.


While near-term risks to gold remain, the recent sell-off looks overdone in the longer term. Uncertainty over where US yields and the dollar will peak are a headwind for gold in the near term. The metal typically comes under pressure when risk-free rates rise and when the US currency strengthens, which raises the price for non-dollar investors and so suppresses demand. With opportunity costs for gold on the rise, we now also see a more constrained outlook for gold, with the metal ending the year around USD 1,850 from USD 1,950 previously, and rising to USD 1,950 by the end of June 2024 down from USD 2,100 previously.


From here, we look for confirmation of a peak in US real yields before adding new recommendations. But equally, those who are long gold should hold these positions in anticipation of a recovery over the next 6–12 months. We also highlight gold's long-term diversification benefits within a portfolio context remain intact.


So, recent volatility has added to the opportunity set across markets in our view.


Main contributors: Solita Marcelli, Mark Haefele, Dominic Schnider, Giovanni Staunovo, Wayne Gordon, Christopher Swann, Jennifer Stahmer


Read the original reportRising yields add to volatility in other markets, 5 October 2023.