2 August 2020
Source: Bloomberg & Momentum Global Investment Management
What this chart shows The chart shows the gold price (left axis) and the 10 year US Treasury real yield (inverted on the right axis) from 2003 to present. Historically, as real, or after inflation, yields have fallen (shown as an upward sloping blue line in the above) the gold price has moved higher. When real yields have risen, gold has typically fallen. In other words, they are negatively correlated.
Coronavirus fears (both initially in the first quarter, and more recently as cases have risen again in the US) and central bank stimulus have driven nominal yields lower. With nominal yields suppressed, higher inflation expectations as a result of the massive central bank and government stimulus have pushed real yields lower and supported a substantial gold price rally. On Monday last week it reached a new all-time high. Why this chart is relevant Gold is widely recognised as a safe haven asset and therefore the uncertainty, and sheer panic at times, witnessed this year has attracted investors towards the precious metal. A net $40bn was invested into gold exchange traded funds over the first half of this year. Factors such as the coronavirus pandemic and rising US-China tensions have contributed to this.
A weakening of the US dollar recently has also been supportive as such a move makes it more affordable for investors holding other currencies as gold is priced in dollars. From a new high, the obvious question is how much further is there to go? Real yields will be key to this. If they remain subdued, the low opportunity cost for holding gold as a non-income bearing asset could help drive further rises. However, a reversal of this recent trend and a pickup in real yields would likely be negative.
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