Real Yields and Gold: What’s Next?

After surging for a year and a half, real yields may be approaching a ceiling. If so, gold is primed for a strong resurgence.

Gold and Silver Performance

Gold has followed a strangely linear decline over the last month, but has finally broken out of its narrow channel to the upside. Traders are taking advantage of lower prices. A slightly weaker US dollar is also boosting the price.

Silver is also seeing some solid gains, though it has not yet reached last month’s peak.

Real Yields vs. Gold

We thought it would be wise to revisit gold’s primary technical price driver: real yields.

Real yields are interest rates minus inflation. For example, if you have a bond that pays 5% per year but inflation is 4%, your real yield will only be 1%.

Real yields are positive when interest rates are higher than the rate of inflation. They turn negative when the inflation rate outpaces interest rates.

Real yields and the price of gold tend to be negatively correlated. Unlike bonds, gold does not pay interest. When real yields Treasury bonds and other interest-bearing assets are high, investors may be more inclined to move their money into these assets to earn a real return. Rising real yields increase the opportunity cost of holding gold, thus potentially decreasing its demand and price.

So, what has been happening with real yields?

Real yields have been skyrocketing since late 2021 alongside the Fed’s aggressive interest rate hikes. Inflation has dropped from 9.1% in June 2022 to 3.2% today as bond yields have continuously moved higher.

In fact, right now real yields are the highest they have been since 2009.

When we overlay gold on the chart of real rates, we see a clear historical pattern. However, we can also see that gold has remained surprisingly resilient during the most recent surge.

This tells a promising story for gold. Despite skyrocketing real rates, investors have been wary to abandon the yellow metal as a safe haven.

Real Yields Maxed Out

Fortunately for gold investors, the spike in real yields may be coming to an end. The Fed is slowing down its rate hikes and CPI has fallen significantly. When real yields stagnate or revert, it will be like lifting a 100-pound sack from the back of the gold price.

That said, inflation is still running significantly above the Fed’s 2% target. When it comes to defeating inflation, the home stretch may be the most difficult.

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As always, thank you so much for reading – and happy investing!

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