Q3 Gold Forecast Overview

• Shifts in the US Treasury yield curve, suggesting a period with stronger short- and intermediate-term rates, has been consistent with a stronger US dollar and weaker gold prices.
• The expectation that the combination of loose monetary policy and expansionary fiscal policy will soon end has started to strengthen, for two main reasons.
• Over the past five years, gains by US real yields have been generally correlated with losses by gold prices.

Rising US Real Yields are Problematic

It’s been said before, but it’s more important now than in the past. It’s important to view recent price action across asset classes through the lens of asset allocation and risk-adjusted returns. Gold, like other precious metals, does not have a dividend, yield, or coupon. Thus rising US yields – importantly, real yields – are problematic.

Gold Futures vs. US Treasury Nominal, Real Yields and US Breakevens (June 2016 to June 2021) (Chart 1)

The expectation that the combination of loose monetary policy and expansionary fiscal policy will soon end has started to strengthen, for two main reasons. First, the Federal Reserve is signaling intent to begin withdrawing stimulus in the near-future. Second, questions linger around the scope and scale of further government spending by the Biden administration.

Change in Gold Futures (%) vs. Change in US 10-Year Yield (Real) (Bps) (June 2016 to June 2021) (Chart 2)

Over the past five years, gains by US real yields have been generally correlated with losses by gold prices. A simple linear regression of the relationship between the weekly price change in gold prices and the weekly basis points change for the US 10-year real yield reveals a correlation of -0.43. As a quick heuristic, we can surmise that further advances in US real yields – like what was seen at the tail end of 1Q’21 – would be detrimental for gold prices.