Falling Real Yields Have Been Supporting Gold Prices

• Today's US CPI showed that inflationary pressures continue to intensify in both DM and EM markets, which has resulted in a fall in US real interest rates recently with US 5Y TIPS finding a new low at -1.91%.
• As we know, US real interest rates have been one of the major drivers of gold over time, along other factors such as the US Dollar, political uncertainty and the total amount of negative-yielding debt.
• The chart below shows the strong relationship between gold prices (in USD terms) and the US 5Y real interest rate in the past cycle; after a little divergence between the two times series observed in the first two months of 2021, falling real yields in the US have been supporting gold prices since March.
• If we regress the weekly changes in gold prices on the weekly changes in the 5Y TIPS (since January 2010), we find that a 1ppt increase in US 5Y real is associated with a 8.3% fall in gold prices.

Source: Bloomberg/MNI

• We have seen that inflation has surprised positively in most of the economies and an increasing number of policymakers have started to express their concern over inflation risks in the coming months.
• Today, inflation rose much higher than expected in the US (+4.2% in April vs. 2.6%), adding pressure on US policymakers to start a tightening cycle.
• Following the sharp rally since the beginning of April, gold has been recently flirting with a key resistance at 1,850, which corresponds to the 200D SMA and the high of the LT downward trending channel.

Source: Bloomberg/MNI