Gold is getting that inflation feeling again

Bloomberg/John Authers/3-31-2021

photo image of stack of American gold eagle coins

“For those who think that the bond market has given us a head fake, and that yields will consolidate or even fall over the next few months and years, gold looks like an interesting way to play that. If the inflation scare takes greater hold and 10-year real yields rise, gold looks at risk of a true bear market. But, as in August, nothing matters more than how the economy emerges from the pandemic and the resulting effect on bond yields.”

graphic image of a book and reading glasses A Good Weekend ReadUSAGOLD note: It isn’t yields alone we should be monitoring but the real yield – that is the yield after inflation is taken into account. At the moment, the real yield on the 10-year Treasury is running in the negative. (Please see chart below.) That should be good for gold. The mystery is why the opposite has occurred since early January. Certainly, real yields are in a minor uptick at the moment, but the overall trend is unambiguously to the downside. Thus far, we have not seen a good explanation for gold’s price behavior since early January. Analysts, though, might be looking in the wrong place. Gold’s slide might have occurred for the most simplistic and straightforward of reasons. It might be correcting naturally from overbought conditions at the end of a two-year, 70% price run-up (from $1195 to over $2035). A correction back below $1700, or even lower, is not unreasonable in that context.

overlay chart showing the real rate of return on 10-year Treasuries and the price of gold since 2000

Sources: St. Louis Federal Reserve [FRED], Board of Governors of the Federal Reserve System, ICE Benchmark Administration

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