Giles Coghlan LLB, Lth, MA
Financial Source
Gold has been touted as an inflation hedge and as a stagflationary play, so why are prices not soaring right now? You could be forgiven for asking this question as high inflation and slowing growth prints have been increasing over the last few weeks. On Monday, Chinese activity showed signs of slowing with industrial production well down at -2.9% vs 0.4% expected. In the US, Goldman Sachs lowered the US GDP growth forecast to 1.6% from 2.2%. The Bank of England signalled that the UK’s GDP would be negative in 2023, but inflation could peak at 10% this year.
So, why is gold not surging higher?
Gold is testing the major trend line lower marked on the monthly chart above around the $1800 region.
The reason for gold remaining pressured lower is due to the interplay between real yields and the USD. Now, many traders know that strength in the USD is a headwind for gold. This provides part of the reason for gold weakness. The USD index moved above 104 on both Fed’s monetary policy and signs of slowing global growth
Real yields are still elevated
Real yields are simply the US bond yield minus inflation expectations. So, if the nominal bond yield is 5%, but inflation is 6% then the real yields is -1%. When real yields fall, that lifts gold prices. So, real yields have pulled back a little, but they are still relatively elevated.
So, a strong USD and relatively elevated real yields are keeping gold prices pressured. Look at the chart below (Gold is in yellow, TIPS is in blue, and DXY is in Purple).
The secret sauce for gold upside
What gold buyers are looking for is the environment where real yields and the USD are both falling. When this happens, gold tends to gain extremely quickly! Look at the chart below where falling really yields and a falling USD sends gold surging higher. Please note that on this chart I use a TIPS ETF as a proxy for real yields as real yields are only updated once a day.
So the ‘secret sauce’ for trading gold is this at the moment:
-
Rising real yields, and rising USD = gold pressured.
-
Falling real yields, and falling USD = gold upside.
As long as this dynamic remains gold traders should pay attention to it.
Our products and commentary provides general advice that do not take into account your personal objectives, financial situation or needs. The content of this website must not be construed as personal advice.
Recommended Content
Editors’ Picks
EUR/USD treads water just above 1.0400 post-US data
Another sign of the good health of the US economy came in response to firm flash US Manufacturing and Services PMIs, which in turn reinforced further the already strong performance of the US Dollar, relegating EUR/USD to the 1.0400 neighbourhood on Friday.
GBP/USD remains depressed near 1.2520 on stronger Dollar
Poor results from the UK docket kept the British pound on the back foot on Thursday, hovering around the low-1.2500s in a context of generalized weakness in the risk-linked galaxy vs. another outstanding day in the Greenback.
Gold keeps the bid bias unchanged near $2,700
Persistent safe haven demand continues to prop up the march north in Gold prices so far on Friday, hitting new two-week tops past the key $2,700 mark per troy ounce despite extra strength in the Greenback and mixed US yields.
Geopolitics back on the radar
Rising tensions between Russia and Ukraine caused renewed unease in the markets this week. Putin signed an amendment to Russian nuclear doctrine, which allows Russia to use nuclear weapons for retaliating against strikes carried out with conventional weapons.
Eurozone PMI sounds the alarm about growth once more
The composite PMI dropped from 50 to 48.1, once more stressing growth concerns for the eurozone. Hard data has actually come in better than expected recently – so ahead of the December meeting, the ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously. We think it’s the latter.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.