All signs point to gold. The safe haven metal took a hit as bond rates jumped in the fourth-quarter of 2016, but has been trending higher despite the rise in real interest rates. Gold bulls should take note of how gold prices have behaved in relation to long-term treasury bonds because they appear to be behaving differently than they have in the past.
On Thursday, the dollar’s strength weighed on gold prices. Gold spot futures declined 0.3% to about $1,318 per troy ounce. The PowerShares DB US Dollar Index Bullish Fund (UUP) has gained 0.4%, while the SPDR Gold Trust (GLD) is down about 0.4%. Meanwhile U.S. government debt yields fell as fresh buying pushed rates to under 3% Thursday morning.
“There is a confluence of factors at play behind this apparent decoupling,” wrote Konstantinos Venetis of TS Lombard. “U.S. inflation breakeven rates have been rising in tandem with oil prices, and gold tends to have a tight positive correlation with moves in inflation expectations.”
After the Great Financial Crisis, the two big exceptions were in the lead-up to the Brexit vote and in the aftermath of President Donald Trump’s election. In the former case, gold rose even as inflation expectations declined with bond yields; in the latter case, the opposite occurred. Here are two charts from TS Lombard, one shows gold decoupling from the 10-year TIPS yield and the other shows how gold tracking the yield curve:
Gold’s outlook looks rosy. The precious metal should benefit from late-cycle dynamics, which tend to favor real assets over stocks. A weaker dollar could help too and Venetis said what appears to be in the works today is the opposite of what happened following the 2013 taper tantrum:
“Back then, the currencies of current account-deficit emerging markets came under pressure as the dollar strengthened from a low point, deflationary headwinds spread and commodity prices suffered. Now, the currencies of large current account-surplus developed markets are appreciating as the dollar retreats from lofty levels, inflation picks up speed and commodity prices increase.”
He isn’t the only one bullish on gold. The commodity team at Goldman Sachs is betting that rising emerging-market wealth combined with geopolitical and trade war concerns will push haven prices higher.
Based on gold supply and demand dynamics, RBC Capital Markets’ gold analyst Christopher Louney forecasts an average price of $1,307 per ounce for gold for 2018. “Each time gold has touched the higher end of the range [this year] it hasn’t been able to cling to that level for very long,” he wrote last week. “The question remains, how sustainable is this level?”
Maybe not that sustainable given the drop today. Or maybe this is merely a golden window of opportunity to buy.
Sign up to Review & Preview, a new daily email from Barron’s. Every evening we’ll review the news that moved markets during the day and look ahead to what it means for your portfolio in the morning.