Gold bounces off a two-year low: Have ASX-listed gold stocks bottomed?

Gold staged its largest rally in more than two months after the Bank of England stepped into the market to buy bonds to avert a potential financial crisis.

Prior to the bounce, spot prices were trading at levels not seen since April 2020 but closed the overnight session almost 2% higher to US$1,660 an ounce.

Gold spot price (Source: TradingView)

The uptick in gold prices has inspired a broad-based rally for beaten up ASX-listed gold miners, with top gainers as at 1:30 pm AEST including:

• Ramelius (ASX: RMS) +6.5%

• Northern Star (ASX: NST) +5.7%

• Evolution Mining (ASX: EVN) +4.6%

Bank of England explained

The Bank of England said it was going to begin buying long-dated government bonds and delay the beginning of its quantitative tightening, which was due to begin next week.

Why?

In short: Pension funds that held approximately US$2.5 trillion in liability-driven investments (LDIs) were facing significant stress amid surging bond yields and a plummeting pound. The pension funds struggled to find buyers for their bond holdings, which were being sold to raise cash. To avoid insolvency, the Bank of England stepped in as the buyer.

Bond yields globally tumbled after the announcement, with the UK 30-year bond yield falling -20.5% from 4.96% to 3.95%.

United Kingdom 30 Year Government Bond Yield (Source: TradingView)

How does this affect gold?

There are two core reasons for gold's recent underperformance.

1. The US dollar index is up 20% year-to-date becoming the preferred safe haven asset and store of value

2. Global bond yields are surging, with the US 10-year Treasury yield currently sitting at 3.76% from 1.5% at the beginning of the year whereas gold does not bear any yield

When the two above assets fall, gold has typically risen. Unfortunately, the US dollar and bond yields have been trending higher for most of the year.

Gold (yellow) vs. US Dollar Index (Source: TradingView)

Is this a turning point?

The Bank of England said its bond purchases will take place from today until 14 October.

"The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided," the central bank said in a statement.

In other words, the Bank of England is buying the troubled pension funds some time to sell its assets and raise cash. So the catalyst that inspired the overnight fall in bond yields is more or less a temporary one.

Global central banks are expected to continue hiking interest rates through to year end and likely remain hawkish in the first-half of 2023.

Still, the decline in bond yields serves as a reminder that gold should see better days when yields finally top out.

"Global recession fears will likely remain the theme for the rest of the year and that should limit how far global bond yields end up going. Gold’s two-year low might be the bottom; if not it should be very close to it," said Oanda senior market analyst, Ed Moya.