Short-Term Headwinds Abound For Gold

Summary & Key Takeaways

  • Through rising real yields, a slowing economy and poor seasonality, short-term headwinds remain for gold and precious metals.

  • However, this move higher in real yields is unlikely to last, and will soon turn from a headwind to tailwind for gold.

  • In an environment of ongoing geopolitical tensions, fiscal dominance, sanctions on foreign exchange reserves and international trade, and the weaponisation of the dollar, the long-term bull case for gold remains as strong as ever.

What is going on with gold?

One of the notoriously difficult asset classes to forecast are gold and precious metals. Touted as a safe haven, store of value and inflation hedge, the recent price action in gold has largely defied such classifications. This is particularly so within a risk-off environment that is currently sweeping through markets.

Unfortunately, the short-term outlook for gold remains decidedly unclear despite some of the conditions being in place that gold bugs have dreamed of for decades in inflation and geopolitical tension. What is evident is that precious metals and mining companies have been unable to escape the recent volatility encompassing nearly all financial assets.

However, given the recent moves higher in real yields, this pull-back is perhaps unsurprising as real yields tend to be the most reliable indicator for the yellow metal.

Negative real yields are of the consequence of financial repression, an environment that clearly favours gold’s store of value attributes. So, with the recent move higher in nominal yields (particular on the long-end of the curve) being of greater magnitude than inflation, real yields are now largely positive across the board and thus have dragged gold lower.

Right now, real yields are signaling further pain may be forthcoming for precious metals.

Indeed, we can see this relationship between gold and real yields by also looking at the rate-of-change in TIPS (via the TIP ETF) compared to the gold price.