Gold prices have recently rebounded strongly and broke through the $2700 mark for the first time on Friday, with a nearly 2% increase for the week. This is about four times the 0.5% increase in the S&P 500 index this week and the fifth consecutive week of gains for gold.

The Federal Reserve began a rate-cutting cycle last month with a 50 basis point cut, leading to a renewed uptrend for gold. However, the latest increase occurred amidst rising US bond yields and a rebound in the US dollar, which could have originally suppressed the rise in gold prices.

Typically, higher yields tend to diminish the attractiveness of gold as it does not generate any income. A strong US dollar also harms commodities, as it makes buying gold more expensive for non-US buyers. Andrew Brenner of NatAlliance Securities wrote, "We are trying to decipher some concerning signs. Why is the price of gold continuing to hit record highs despite the strengthening US dollar?"

Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, pointed out some factors that may drive the prices of precious metals higher. Hayes wrote about global bond yield, saying that the reaction in the gold market indicates "investors are skeptical about sustained high yields."

In the past month, the 10-year Treasury yield has surged from around 3.7% to 4.08%. The US dollar index, which tracks the performance against currencies like the euro and the yen, has risen nearly 3% in the past month.

However, Hayes noted that he expects US Treasury yields to decline over the next year. He added, "Also, the yield spread between the US 10-year and 3-month Treasury bonds has not broken out of a 'flat or inverted' pattern, indicating that the trend in bond yields has not been unfavorable for gold."

Over the past 20 years, within this pattern, gold has seen an average annual increase of 23%, outperforming other asset classes. All this has happened as traders anticipate further rate cuts by the Federal Reserve.

The CME Group's FedWatch tool shows that the market is expecting an 88% probability of a 25 basis point rate cut by the Fed in November, and a 75.6% probability of another 25 basis point cut in December.

Editor/ping