Gold and Utilities: Defensive Appeal Under Pressure

Utilities have historically faced headwinds when yields rise, and two characteristics of the sector account for much of that sensitivity.

The first is capital intensity. Generation assets, transmission networks and water systems are funded largely with long-dated debt, so higher yields raise the cost of new issuance and refinancing. The second is income competition. As mature, regulated businesses with stable cash flows and dividends, Utilities are often treated as bond proxies and carry a longer effective duration than most equity sectors. When Treasury yields climb, the spread between the sector’s dividend yield and the risk-free rate narrows, and a higher discount rate is applied to those long-dated cash flows. Both effects have often coincided with weaker relative performance.

Gold has no balance sheet to finance, but it shares the second sensitivity in a more direct form. It generates no income, so the return forgone by holding it rises as yields increase. A Utility’s dividend narrows the gap with Treasuries, whereas Gold offers no income to offset it, leaving its opportunity cost fully exposed to the level of rates. That relationship has historically been tighter with real yields than with nominal ones, since real yields measure what an investor gives up after inflation. When real yields rise, as they have alongside nominal yields in recent weeks, the cost of holding a non-yielding asset increases in step.

In this week’s Equity Leaders Weekly, we examine the Gold Continuous Contract and the Utilities sector through the iShares U.S. Utilities ETF (IDU).

The iShares U.S. Utilities ETF (IDU) offers a broad view of the US Utilities sector through companies that supply electricity, Gas and water. Electric and multi-utility companies make up most of the fund, alongside smaller allocations to independent power producers, Gas and water utilities, and environmental services companies. Because it holds equities, its returns reflect company earnings, dividends and broader stock market conditions, as well as the sector’s sensitivity to interest rates. Fund expenses also affect returns.

The attached Point & Figure chart for IDU shows a weak SIA SMAX score of 2/10, along with a bearish Spread Double Bottom signal. The chart currently sits in a column of O’s, with initial resistance at the 3-box reversal level of $108.91. The recent all-time high of $120.25 could offer further resistance.

On the downside, initial potential support lies at $98.65, with further support identified at $89.35.

Gold’s price action at these levels may indicate that rising yields are outweighing the factors that would typically offer support. While geopolitical tensions and persistent inflation could be expected to draw interest towards Gold, sustained strength has often required stable or falling real yields. There is limited evidence so far of a broad move back into the metal, which may suggest that investors are finding sufficient compensation in income-bearing assets. This could point to an environment where the opportunity cost of holding a non-yielding asset remains the dominant influence, even as inflation concerns persist.

At the same time, Gold has historically responded to shifts in rate expectations before they are fully reflected elsewhere. If yields stabilize or expectations for further tightening ease, some of that pressure could gradually lift. In that sense, Gold may be acting more as a gauge of how restrictive markets expect monetary policy to become than as a reflection of current risk appetite.

The attached Point & Figure chart for Gold shows a weak SIA SMAX score of 3/10, accompanied by a Low Pole Warning signal. Initial resistance is identified at the 3-box reversal level of $4,562.35. Above that, further resistance lies at $4,938.43, followed by the recent all-time high of $5,452.43.

On the downside, potential support lies in the $3,893.92–$3,971.80 range, followed by $3,457.69, which represents an approximately 50% retracement of the prior advance.