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Can Rising Yields Stop Gold?

By Ashraf LaidiMarket OverviewFeb 02, 2018 06:40AM ET
www.investing.com/analysis/can-yields-stop-gold-200286328
Can Rising Yields Stop Gold?
By Ashraf Laidi   |  Feb 02, 2018 06:40AM ET
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In my article from 4 months ago about gold versus bond yields, I concluded that gold would reach $1330-1350 from the $1280 level at the time of writing the analysis. So where do we go from here?

The Real Deal

As bond prices fall and their yields surge to the highest in over four years, there may be a risk that the advance in yields could begin eroding the returns from gold. After all, gold pays no interest or coupon. I mentioned four months ago that “we must look at the 'real' level of interest rate, or interest rate minus inflation. It does not matter how high interest rates and bond yields are if their level is not high enough to make up for the level of inflation”.

How’s inflation doing?

Is it rising faster than bond yields? The yellow graph in the chart shows gold to have dropped from its $1365 high, while the red graph indicates the persistent rise in real US 10 year yields (US 10 year yield minus inflation). One possible scenario where US bond yields rise faster than inflation is where growth dynamics continuing to improve, while inflation expectations are kept lower by the delayed effect of the strong dollar.

Commodities-based play

Is that likely? So far, I expect commodities to maintain their secular rally as the advances in energy prices continue to spill onto prices of metals and agriculture. This will in effect, lift inflation expectations, while capping the US dollar due to improved dynamics in the rest of the world.

And as long as asset management companies and banks continue raising allocation to commodities in their portfolios, anti-USD positioning will likely be prolonged. That also means any USD gains will be short-lived. Said differently, its no different from the commodity bonanza years of 2003-2007 and 2009-2011.

Let us not forget that as the economies of Europe and Asia shift from recovery to expansion, they face more ample scope for policy tightening than in the US. The implications of these relative dynamics are: continued improvement in yield differentials in favour of non-US government bonds and ultimately persistent USD weakness, or supressed gains at best.

Gold outlook

And so before I update my gold forecast, let’s reiterate the following 2 crucial points made at the start of 2017 as further backing to my short USD call:

1) The USD will not necessarily benefit from further Fed rate hikes as long as the major central banks are also normalizing their policies (reducing QE, ending QE or raising rates);

2) Since USD has always weakened at the end of Fed easing cycles or ahead of tightening cycles, it has also weakened around the start, or during Fed’s tightening cycles as long as the “rest” of the central banks cycles followed closely behind.

With that in mind, I call for gold to test a preliminary high of $1420 in the first half of the year, followed by $1510 in the 2nd half. Stay tuned.

Gold vs Real Yields: Feb 2, 2018
Gold vs Real Yields: Feb 2, 2018

Can Rising Yields Stop Gold?
 

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Can Rising Yields Stop Gold?

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Ravi Runa
Ravi Runa Feb 03, 2018 2:55PM ET
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now gold goes to downtrend....
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Feb 02, 2018 12:14PM ET
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when you start hearing or reading marketing agencies start pitching gold prices lowering and now's your lucky chance to buy, is when you'll kmow gold is toast for awhile. for those who have this stuff stacked up in their hovel, it doesn't matter i guess. you can't use the stuff to barter or sell without assay, but if a stack keeps you warm at night, well then it's ok. wait, gold doesn't keep you warm at night. stuff is useless, much like my stack of sliver which i bought decades ago when i had water on my brain.
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WANDERLUST srt
WANDERLUST srt Feb 02, 2018 11:09AM ET
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Strong $ will ****gold
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Timochin Khan
Timochin Khan Feb 02, 2018 8:56AM ET
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Excellent report...Well done...
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