Gold and dollar have long been inversely proportional to each other. Gold is the quintessential “anti-dollar” — a place to turn for those who distrust fiat currency — so it seemed natural that prices would rise in a world of low real interest rates and cheap dollars.
The unraveling of the relationship between gold and real interest rates could be a paradigm shift for the precious metal, leaving investors struggling to calculate its “fair value” in a world where the old equations don’t seem to apply. It’s also raising questions about if and when the old dynamic might reassert itself – or whether it already has, just from a new base.
Bullion hasn’t moved much, even as inflation-adjusted gold rates soared this year to the highest since the financial crisis. Real yields — measured by the 10-year Treasury inflation-protected securities, or TIPS, — jumped again on Thursday to the highest since 2009, while spot gold nudged down a mere 0.5% the same day. The last time real rates were this high, gold rates were about half the price.
U.S. 10-year bond yields at fresh 16-year highs as the U.S. dollar near a one-year high continues to keep a lid on the gold market; however, according to one market strategist, the precious metal's downside remains limited as economic uncertainty and rising U.S. debt provide solid support.
After last week’s monetary policy decision where the Federal Reserve left interest rates unchanged, it is clear the central bank is done raising interest rates.
Slightly hawkish Fed and global central banks are currently suppressing gold, although some signs of economic stress are also keeping the market supported overall.
Moreover, ECB hasn’t given any clarity on inflation trajectory going forward and now most FED members are expecting slow landing.
Gold has a bright future in the coming year, where market participants expect it to rise to a new all time high even if there is a mild recession in the global economy.
Along with growing economic uncertainty, growing deficit problems in the U.S. are also creating some support for gold as it will limit the Federal Reserve's monetary policy decisions after it raised interest rates at an unprecedented pace.
Gold has a solid long-term bullish support and an impending government shutdown could create some near-term safe-haven demand for the precious metal
Looking to the New Year, the analysts said that they see gold prices pushing to $2,200 an ounce by the end of 2024 as investors realize how difficult it will be for central banks to bring core inflation down to their 2% targets.
There’s always the potential catalyst for a recession that could push investors to safe haven assets like gold. Supporting gold prices is also central bank buying, so the bottom hasn’t essentially fallen out for gold.
