- Will October CPI exceed 6.5% YoY?
- Gold’s price determined by real long-term yields
- The metal looks largely range-bound for the near-term
From time to time, I check in with the gold price.
The precious metal caught a small bid the past few weeks… most notably after 10-year bond yields pulled back.
This move has some asking whether the metal about to make another rally – especially given the Fed’s easy money policies and hotter-than-expected inflation for longer?
To start – let’s look at 10-year nominal yields… as these instruments will help offer us a clue.
Nominal 10-Year Yield Retreats
After Jay Powell bowed to equities two weeks ago – bond yields gave up some ground.
For example, the 10-year pulled back after several weeks of moving sharply higher – which sees it now trading in a range between 1.40 – 1.50%
Nov 09 2021
As readers will know, I think this is largely an ‘equity friendly’ zone for bond yields.
In other words, as long as these yields stay well above 1.0% and below 2.0% – equities will not worry.
For example, a number below 1.0% would imply that the bond market is concerned about the outlook for growth (and inflation).
This would be bearish.
On the flip side, should these yields start breaking above 2.0% – markets will fret about rising rates and any impact to future cash flows.
What matters for gold is not so much nominal yields – it’s real yields.
Real yields are those which are adjusted for inflation.
Where it becomes interesting for the yellow metal is when we overlay the two:
Nov 09 2021
The right-hand axis (in white) are real 10-year yields inverted. The left-hand axis (in blue) is the gold price in USD.
Why invert these yields?
Gold has no yield and historically has a strong inverse relationship with 10-year (and 5-year) real yields.
The less bonds pay after inflation, the less unappealing gold will appear.
But as I have been explaining to readers of late – real long term yields have remained astonishingly low.
Now if we look at the chart a little more closely – there is one other period that looks similar to today.
That period was 2012 through early 2013.
At that time, real yields stayed low during the Federal Reserve’s “QE Infinity” and gold began to fall.
Not surprisingly, the bond (and metals) market was trying to tell us something…
Fast forward a few months to March 2013 and we saw the first dramatic fall for gold and then the “taper tantrum”.
Here bond yields shot upward (i.e. a lower white line on the chart above) in response to a hawkish Fed.
Not surprisingly, gold was crushed as a result.
The question is – are we about to see something similar?
My best guess is this is what I expect in the intermediate-term; i.e., the next 12-24 months.
I expect real yields to advance which will pressure gold.
However, beyond that, it would not be surprising for yields to once again retreat (as the prospect of disinflation returns – due to excessive debt and demographics) – and growth disappoints.
At that time, gold may begin to regain its shine.
Let’s now look at the chart for any other possible clues…
Gold – Weekly Chart
Gold managed to catch a small bid the past few weeks… moving from lows of ~$1,720 to today’s close of around $1,830
Long term readers will recall me saying look for support around the $1,680 zone.
Gold’s bid was mostly due to the factors I outlined above… i.e., lower yields.
But the question is… can gold continue its short-term momentum?
Nov 09 2021
Well maybe that answer will depend on tomorrow’s all-important monthly CPI read…
Now the October CPI figure could be as high as 6.5%+ YoY… making it the hottest in 30-years.
What will that do to gold (if anything)?
You would think it would rally (as this will drive real yields lower – pending any corresponding move in nominal yields)
Now technically, if gold closes above $1840, the bulls may be able to push it further (e.g. to the May highs of $1,920)
However, a close back below this level and it’s the bears who are in control.
Zooming out – for the most part gold is caught in a range between $1,680 and $1,920.
The bulls need to see gold first break above $1840 – and hold that level. However, the bigger test will be clearing the high of $1920 May this year.
But what will be the catalyst to drive the price higher?
For that, I think we will need to see real yields continue to meaningfully decline.
I don’t think that’s what we will see.
Putting it All Together
It’s fair to say that central banks around the world still seem to be more dovish than hawkish.
However, they are watchful… ready to act.
As a result, some investors are using their liquidity / excess cash to hold the precious metal to hedge against persistent inflation.
Let’s see what we get with tomorrow’s U.S. consumer-price index for October.
Anything hotter than say 6.5% YoY… and it may awaken the gold bugs (and possibly the Fed)?