(Kitco News) - The bond market has been a significant headwind for the gold market as inflation fears have pushed yields higher in recent weeks, raising the opportunity cost of holding the non-yielding asset.
Although yields have started to fall, one market strategist said this shift in Treasuries still won’t provide much support for the yellow metal through the second half of the year.
In his mid-year commodity report, Mike McGlone, Senior Market Strategist at Bloomberg Intelligence, reiterated his bearish outlook for gold, noting that in the first quarter, the precious metal reached its highest valuation relative to Treasuries in nearly 40 years.
He added that at current levels, if the bullish momentum in equity markets starts to slow, U.S. bonds could become a cheaper, more attractive safe-haven asset than gold.
“The T-bond index has been plunging vs. the S&P 500 since 2021 on the back of the biggest money pump in history. Will T-bonds, which reached about 5.20% in May -- the highest yield since 2007 -- continue melting vs. stocks, or might the flush mark an endgame? We lean to the latter, notably due to the vast room for reversion,” he said. “Gold grabbed alpha in 2025 -- its best year since 1979 -- but the only game in town seems to have shifted to stocks, which could be a lose-lose for gold. Higher equities may mean higher rates and competition. If stocks deflate, T-bonds might win.”
He pointed out that the relationship between gold and Treasuries appears to be reaching another inflection point. He explained that the start of the global COVID-19 pandemic was the initial buy signal for gold relative to bonds, but added that the Federal Reserve’s new focus on inflation could signal the end of this six-year trend.
Although the Federal Reserve left interest rates unchanged at its June monetary policy meeting, its updated economic projections signaled support for a rate hike by the end of the year. At the same time, Federal Reserve Chair Kevin Warsh emphasized a focus on price stability.
“Gold looks vulnerable in 2026 if tightening and rising real yields become the dominant macroeconomic regime. The metal posted negative returns in seven of the past 26 years, and six of those were dominated by tightening and higher real yields; in the seventh, no strong theme emerged. By contrast, gold rose in each of the five years when de-dollarization or reserve diversification led, with 2025 delivering its strongest return (more than 60%) in the past 26 years,” said McGlone.
As gold prices look vulnerable, McGlone said that silver will also be dragged lower, even as solid fundamentals and industrial demand would support higher prices. He added that silver is currently 18% undervalued given the strength of the manufacturing sector.
“Silver is unlikely to escape gold's pull lower, even with robust industrial demand and a physical deficit, leaving economic drivers as the key constraint on a sustained rebound,” he said.
