Historically gold and real yields have had a negative correlation. This makes a lot of sense when we consider what real yields are.
To calculate real yield, you first take a US treasury yield. The yield of a 10-Year UST gives an accurate idea of the risk-free rate, the yearly gain that can be made in the current market with no risk of loss of investment.
To calculate how much you can actually make in the market, subtract the inflation expectation, and you're left with the real yearly gain that can be made in the current market with no risk of loss of investment.
Considering gold as a 0% yielding bond can be helpful to understand the relationship. Now we can see why the higher the real yield, the lower the gold price, and vice versa.
At the moment real yields have made a large drop for two main reasons:
1. Price inflation expectations rose due to huge supply chain problems caused by lockdowns worldwide.
2. Yields fell to new lows as more and more quantitative easing from the Fed pushes rates lower (please let me know if you want a full explanation of this).
Interest rates are going to stay low as QE to infinity remains the Fed's only tool. So, the only way for real yields to stay low would be for the current inflation rate to hold steady.
Of course, this is actually quite impossible as, in order to keep interest rates low, huge amounts of quantitative easing is removing liquidity from the economy.
Inevitably, as real yields rise, eventually pushing back into positive territory, gold will become a less attractive investment as anything other than insurance of absolute system failure.
Just like before the great financial crisis, it's likely that gold prices will have a 20-30% pullback in the short-term, before becoming the long-term performer in the years to come.
To calculate real yield, you first take a US treasury yield. The yield of a 10-Year UST gives an accurate idea of the risk-free rate, the yearly gain that can be made in the current market with no risk of loss of investment.
To calculate how much you can actually make in the market, subtract the inflation expectation, and you're left with the real yearly gain that can be made in the current market with no risk of loss of investment.
Considering gold as a 0% yielding bond can be helpful to understand the relationship. Now we can see why the higher the real yield, the lower the gold price, and vice versa.
At the moment real yields have made a large drop for two main reasons:
1. Price inflation expectations rose due to huge supply chain problems caused by lockdowns worldwide.
2. Yields fell to new lows as more and more quantitative easing from the Fed pushes rates lower (please let me know if you want a full explanation of this).
Interest rates are going to stay low as QE to infinity remains the Fed's only tool. So, the only way for real yields to stay low would be for the current inflation rate to hold steady.
Of course, this is actually quite impossible as, in order to keep interest rates low, huge amounts of quantitative easing is removing liquidity from the economy.
Inevitably, as real yields rise, eventually pushing back into positive territory, gold will become a less attractive investment as anything other than insurance of absolute system failure.
Just like before the great financial crisis, it's likely that gold prices will have a 20-30% pullback in the short-term, before becoming the long-term performer in the years to come.