If you’re wondering which the direction the gold price is likely to move next, you might want to pay closer attention to inflation-adjusted US bond yields.
As this chart from the Commonwealth Bank shows, the relationship between the spot price for gold and real US 10-year treasury yields has been more than solid in the period following the global financial crisis.
Where real yields head, the gold price tends to do the opposite.
Vivek Dhar, mining and energy analyst at the Commonwealth Bank, says the relationship between the two is likely to continue in the period ahead, although he admits that it’s hard to determine just which way real yields will move given uncertainty over potential tax reforms in the US.
“There is considerable risk to our US interest rate outlook with so much uncertainty surrounding US tax plans,” he says.
“The Border Adjustment Tax (BAT) has significant implications for the US economy and could cause near-term downside risks if implemented. In this environment, the FOMC is unlikely to boost rates as much as it is currently projecting.
“However, a simple corporate rate tax cut could see interest rate expectations lift above our forecasts.”
While no one knows just exactly what will happen on that front, or if any tax changes will even be implemented given current political uncertainty in Washington DC, the CBA is currently forecasting that the US Fed funds rate will plateau at around 1.5-1.75%, around half the 3% level projected by the FOMC in its latest forecasts.
Given the past relationship between interest rates and inflation on the gold price, that suggests that any potential downside for gold may be limited should the CBA’s forecasts be on the money.
The spot gold price currently sits at $US1.254.86 an ounce.