MacroZen Market Analysis | What happened to gold?

Macrodesiac

February 19, 2021

What happened to gold? 

 

From $1855 to $1770 in seven short days…

 

Maybe it’s that rotation into the new digital gold…

 

Maybe there’s a global realisation that gold is nothing more than a shiny pet rock…

 

Or maybe gold is a far better hedge against DEflation than INflation? 

 

Who knows?

 

As usual, we need to apply context

 

Many of the usual macro indicators have been severely influenced by the pandemic and central bank interventions, so there’s no better time to KISS.

 

No this isn’t a late Valentines message gone wrong….

 

Keep. It. Simple. Stupid. 

 

At least, that’s what I always tell myself. 

 

So, in a world dominated by messy inflation expectations & real interest rates calculated on potential inflation guesses, how can we look at gold from a macro perspective?

 

We cheat. 

 

Kinda.

 

Take a look at this chart

 

 

I have overlaid the US 10 year yield with the inverse gold price (orange). 

 

Yes I know that makes it a bit harder to lazily glance at, but it shows something… 

 

We can clearly see that as nominal yields increase the price of gold decreases (and vice versa).

 

The relationship between these two has been strong ever since August 2020 when 10Y yields bottomed at 0.5% and gold topped at $2075.

 

Usually, Gold and real yields are tightly linked, but inflation is tricky to factor in right now… 

 

(Real yields = inflation adjusted yields e.g. if a bond yields 1%, but inflation runs at 2%, that bond offers a negative real yield of -1%) 

 

Gold sits permanently at zero yield.

 

The (very) simple version: When real yields are minus 1%, gold offers an inflation-adjusted return of +1%.

 

If real yields head higher (back towards zero), gold will take a hit and lose some appeal vs bonds. 

 

The nominal yield correlation won’t last forever. 

 

Over the longer term inflation measures will stabilise, and real yields will be more important than nominal yields for the gold price.

 

If this correlation holds, a push higher in yields should see gold fall further – a break below 1764 alongside rising yields would target the next key support at $1670…

 

 


 

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