Something unusual is going on with the gold price

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  • The gold price has risen more than 7% since mid-December, helped by a weaker US dollar
  • It fell by over 1.2% on Tuesday, the steepest decline since July last year
  • The Commonwealth Bank expects higher inflation-adjusted US bond yields will weigh on the gold price this year

Something unusual is going on with gold right now.

That’s the view of Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, who says the inverse relationship between inflation-adjusted US 10-year US bond yields and the gold price has broken down in recent weeks.

“Gold prices and US 10-year real yields have historically had a tight inverse relationship, which is much stronger than the inverse relationship between the US dollar and gold prices,” he says, adding that “lower yields increases the appeal of non US interest bearing assets like gold”.

However, as seen in the chart below supplied by Dhar, the inverse relationship between the two has broken down recently with the gold price pushing higher despite a lift in real US bond yields.

Source: Commonwealth Bank

Based on the historic relationship between the two, a lift in US real yields would normally act to weaken the gold price.

Dhar says a weaker US dollar largely explains the recent disconnect, although he doesn’t expect that to last, predicting that the relationship between US yields and the gold price will likely reassert itself.

“We believe this relationship will continue to hold,” he says.

“Tuesday’s price move hints at that relationship being revived, but only time will tell as the stronger US dollar played a key role too,” he adds, referring to the 1.3% slide in the gold price, the steepest since July last year.

With many, including the Commonwealth Bank’s economics team, expecting the Federal Reserve to hike rates several times this year and next, Dhar says the likely lift in real bond yields should weigh on the gold price.

“If the market moves towards CBA and FOMC rate hike expectations, we should see real yields continue to rise, which should weigh on gold prices this year,” he says.

“We see gold prices gradually declining to $1,265 an ounce by the December quarter this year, but a weaker US dollar remains a key upside risk.”

It currently trades at $1,329 an ounce.

Dhar says the other consideration is a lift in investor risk aversion — something that tends to help gold as a safe haven asset — although he expects any increase in volatility would probably support the US dollar and bonds more than gold.

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