We know gold likes inflation, even during rising interest rates—for as long as Fed tightening does not considerably erode the excess of inflation over interest rates.
Said differently—as long as real interest rates (or yields) remain on a downward path, or do not regain positive territory, gold can hold its own.
So why has gold performed so well during the recent rise in real 10-year yields from -1.0% to -0.48%? No, I will not provide the easy answer of geopolitics (even if it's partly true as mentioned here) There are many reasons—but here is an alternate explanation below.
We've heard of interest rate differentials, yet what about inflation differentials? Breakeven 2-year inflation is at a new high of 3.6%, while 10-year breakeven inflation is at a more stable 2.5%. This is partly related to the shrinking gap between 10 and 2-year US govt bond yields, which went from a high of 1.60% in March of last year to 0.49% today. Although 10-year yields remain higher than 2s (by 0.49%), the gap has shrunk to the extent that an inverted yield becomes a matter of time…as well as predictions for an upcoming recession.
The most striking aspect of all this is the plunging spread between 10 and 2 year inflation breakeven. It is now at a record low of -1.2%. It's another way of telling us that inflation will drop back in the longer term, thereby possibly cutting the life of any Fed tightening campaign. An inflation level that is high enough to eliminate deflation fears, but low enough to keep Fed haws at bay is exactly what gold wants.
I've consistently explained over the past 8 months, that gold will survive the inevitable Fed (tapering & tigtening) despite some chart similarities to 2012-2014. It's always helpful to watch the reasoning behind the thinking--discussed here, in here and here...and of course don't miss this one here