“The challenges facing gold are that as the economy recovers, US yields are lifting and the market is anticipating that the Fed’s policy support will pivot at some point and interest rates will rise – the bond market is moving to price that in,” Mr Shaw said.
“The higher bond yields move, both nominal and real, the more challenging it will be for the gold price. That’s what we saw overnight.”
Real yields adjust for the level of inflation in the economy. Falling real yields supported the gold price rally of 2020 that lifted the metal above $US2000 an ounce. As inflation is embedded in higher bond yields, that reflects unfavourably on gold’s inability to generate income.
“Even if we see more inflation in the US, the challenge will be when central banks start pivoting and tightening policy. Rates and yields will go up and you only have to look post-GFC to 2017 to see what gold does when rates and yields trend higher,” Mr Shaw said.
“The gold market is in a real dichotomy and there’s real tension between the idea of gold acting as an inflationary hedge and the reality that a non-yielding asset is going to struggle if yields on other safe haven assets start to rise.”
As gold’s behaviour challenges the conventional wisdom that the precious metal is an inflationary hedge, it also challenges its usefulness as a safe haven asset.
“Gold is not necessarily an inflation hedge. It’s not even a great safe haven asset if you look at how it behaves in turmoil,” market analyst at contracts for difference provider IG Australia, Kyle Rodda, said.
“As long as we’re seeing data like we saw yesterday indicating that the Fed needs to intervene earlier than expected, it will be bad for gold.
“If inflation surges and it looks like the Fed isn’t aggressive enough in stamping it out with rate hikes, or becomes very complacent, and lets inflation run very hot, that’s when gold might become an attractive inflation hedge.”
The key metric to watch for is movements in the level of real yields, and Wednesday night was the perfect microcosm.
“We saw real yields rise as a result of increased bets of interest rate hikes and asset tapering from the Fed, making gold – at the margin – less attractive, so the price fell,” Mr Rodda said.
The initial spike in the gold price following the data release will be some comfort to gold bulls, but market experts mostly attributed the reaction to algorithmic trading.