Gold Jumps Above $1,800. What’s Next?

Gold jumped above $1,800, and it’s the disappointing jobs data that added fuel to the fire.

The gold market is a funny place. On Thursday (May 6), I complained that the yellow metal couldn’t surpass $1,800:

The price of gold has been trading sideways recently as it couldn’t break out of the $1,700-$1,800 price range. This inability can be frustrating, but the inflationary pressure could help the yellow metal to free itself from the shackles.

And voilà, just later that day, the price of gold finally jumped above $1,800, as the chart below shows. Hey, maybe I have to complain about gold more often?

But jokes aside. The move is a big deal, as gold has finally broken above the key resistance level. What’s important here is that the breakthrough wasn’t caused by some negative geopolitical or economic shock, but rather by fundamental and sentiment factors.

So, what happened? First, there is a weakness in the US dollar. With global economic recovery progressing, the safe-haven appeal of the greenback is simply vanishing. Another issue here is – and I pointed this out in the Fundamental Gold Report dedicated to the latest ECB’s meeting – that the pandemic in the Eurozone has reached its peak. So, the worst is already behind the euro area, and it can catch up with the US now, supporting the euro and gold against the dollar.

Second, the bond yields have been heading lower recently. As one can see in the chart below, the real interest rates have corrected significantly since their peak in March. In early May, the 10-year TIPS yields slid further, returning to almost -0.90 percent.

What is noteworthy here, the real interest rates declined more than the nominal interest rates. It resulted from the increase in the expected inflation. Indeed, as the chart below shows, the 10-year breakeven inflation rate jumped in early May. As a reminder, I wrote on Thursday that “the inflationary pressure could help the yellow metal to free itself from the shackles” and this is exactly what happened.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does ...

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