Gold failed to regain the $2,000 level after the Fed’s hawkish shift triggered a rise in the US 10-year real rate. The 10-year inflation breakeven also declined.

The gold price consolidated in the past ten days in a very tight range between $1,800 to the upside and $1,770 to the downside. The $30 range turned out to be just a continuation pattern, part of a bearish trend that started with the most recent Fed meeting.

Since the Fed delivered a hawkish surprise this June, the price of gold tumbled. Equities recovered the lost ground quickly, but not gold. The main explanation for gold’s inability to bounce comes from the rise in the US 10-year real rates. There is an inverse correlation between the two, and thus gold suffers when yields perform.

Real Rates Rally Set to Continue

The rise in the long-term real rates is poised to continue through the summer months. A cautious stance on gold’s price may be lucrative given strong US economic activity and a less accommodative Fed.

In 2020, the global gold mine production decreased for the second year in a row, after nine years of constant growth. The decline in production may justify part of the bullish move in 2020 when the price of gold reached a new all-time high.

Yet, the recent bearish trend looks far from over. The market participants should not be surprised to hear the Fed signaling the tapering of its quantitative easing programme at the Jackson Hole Symposium in August.

If that is the case, real rates should benefit, weighing on the gold price via lower investment demand. It is not unusual for the Fed to first turn slightly hawkish, as it did at its June meeting, and then to act by literally signaling the first tightening after a crisis.

As such, it is only normal for investors’ expectations of further hawkishness to rise ahead of the Jackson Hole Symposium. After all, the Fed used the symposium in 2020 to announce its shift to AIT – Average Inflation Targeting. If it uses this year’s opportunity to signal the tapering of its asset purchases, gold is a collateral victim.