Supportive gold and real yields

Gold has risen by more than $100 after hitting $1,750 at the FOMC.

With the tapering decided and rate hikes on hold, many were expecting a bearish direction, but that did not happen.

As I have mentioned several times in this article, one reason is the decline in real interest rates.

Real interest rate is the nominal rate minus the inflation rate, but to put it another way, it might help to picture it as a currency pair of “cash”/“goods.”

If we say the nominal rate is the future rate you earn on deposits (technically different, but we’ll skip that),

the current U.S. 10-year yield is around 1.56%.

On the other hand, the 10-year breakeven inflation rate (BEI)

is hovering around 2.73%.

Given the rising inflation reported in various places, this should come as no surprise, but this red horizontal line marks the upper bound of expected inflation that advanced during the large-scale easing after the Lehman Shock around the 10-year mark.

Compared to then, inflation is running higher now, so the amount earned from deposits is outpaced by rising prices.

And since that gap is widening faster than the pace at which U.S. interest rates rise, merely holding cash means you keep losing value.

It is likely to reverse eventually, but at least until inflation shows signs of cooling, even if U.S. rates start rising somewhat, the gap will not narrow.

Real interest rates have been widening since the start of the COVID-19 response easing.

The price increases across stocks, cryptocurrencies, commodities, food, and services can be seen as reflecting these interest-rate differentials.

Last CPI release showed a year-over-year inflation rate of 5.4%, a very high number, but it exceeded economists’ forecast of 5.8% and resulted in 6.2%.

Instantly, U.S. Treasuries were sold, and the dollar rose.

Reflecting the dollar’s rise, gold briefly dipped and then gradually bought, breaking through the $1,830 level.

The rapid surge in expected inflation led to buying gold.

Gold priced in dollars can play a strong role in preserving value in this environment.

Ultimately, with rate hikes pushing the dollar higher, and even more so because gold’s value rose, dollar-denominated gold appears to be bought more than the price level might suggest.

Now, I would like to analyze gold’s upside from a technical perspective.