Gold Q2 2021 Fundamental Forecast

Relative Underperformance Likely To Continue

Our 1Q’21 forecast for gold prices was both incorrect, insofar as gains were expected, and correct, with other metals, precious or otherwise, pacing the field ahead of bullion. But the source of the error in our fundamental forecast was easily pinpointed early in the quarter: the composition of the US Congress changed. At the time the 1Q’21 forecast was written, there was no ‘blue wave’; the Georgia Senate elections had not flipped to Democrats yet.

Gold, Ingots, Treasure, Bullion

And thus, there is a significantly different background for gold prices as we enter 2Q’21 as compared to 1Q’21. Instead of a world of low interest rates and a slow-but-steadily improving economy cultivating a near-term environment of persistently negative real US yields, the Biden administration’s first stimulus package brought forth a jump in both nominal US Treasury yields and inflation expectations, the net-result of which was rising real US yields.

If Real US Yields Keep Rising And Volatility Drops, Gold Is In Trouble

It’s important to view recent price action across asset classes through the lens of asset allocation and risk-adjusted returns. Gold (GLD), like other precious metals, does not have a dividend, yield, or coupon (as noted earlier), thus a jump in both US nominal and real yields presents a problem. Moreover, rising US Treasury yields, narrowing the gap with key metrics like US S&P 500 dividend yield (and above that, the earnings yield), are provoking reallocation not just in commodities, but equities and FX as well (SPX).

Bond markets are the ‘tail that wags the dog,’ and while longer-term fundamentals matter, a rapid advance in yields can provoke short-term havoc that runs counter to longer-term expectations. In this case, which is a steady erosion in real yields due to the combination of loose monetary policy and expansionary fiscal policy, instead catering to a rise in real yields in the short-term.

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