Fundamental outlook for gold is mixed

It took US inflation rates to reach their highest level since March 1982 and the emergence of a new strain of COVID-19 for markets to adopt a more cautious tone important enough to allow gold prices to go back to T4’21. Gold’s gains, however, were not based on news about Evergrande in China or a possible breach of the US debt ceiling, both of which have apparently disappeared from the radar of market participants.

While posting a modest positive performance in the last quarter of 2021, the shift of several central banks – the Federal Reserve included – to start pulling stimulus efforts out of the pandemic era had started to weigh on long-term inflation expectations. , driving up real yields at various points in time, undermining the appeal of gold.

At the start of Q1’22, the stakes therefore remain the same. If Western economies resist the push for the Omicron variant during the winter months without a prolonged slowdown in economic activity, central banks are likely to continue their efforts to reduce asset purchases and raise interest rates by. close to zero.

Rising real yields in the United States present a challenge

Here we are again, as we were with the last quarterly gold forecast. The combined forces of high realized inflation in the short term, faced by central banks raising interest rates and easing longer-term inflation expectations, may prove too overwhelming to allow prices to rise. ‘gold to support a significant recovery.

Gold, like other precious metals, does not have a dividend, yield or coupon, so rising US real yields remain problematic. Put simply, when other assets offer better risk-adjusted returns, or more importantly, offer tangible cash flow during a time of inflationary pressures raging, then assets that are not generating significant returns often fall. in disgrace. This is true for gold prices, as it is for high growth, zero income tech companies.

Gold Futures vs. US Treasury Face Value, US Real Yields and Break-even Points: Daily Calendar

Source: Bloomberg

The point is that most of the stimulus provided by central banks and deficit spending implemented by fiscal authorities are now in the rearview mirror. These fundamental catalysts have proven to be an important fuel for gold’s rise in 2020, but even though Omicron is raging, the political appetite for more stimulus in the face of persistently high inflation readings does not appear to exist.

Of course, other factors may come into play. China’s Evergrande and other real estate developers in the world’s second-largest economy could default, sparking contagion that would eventually weigh on global growth rates if China’s economic growth fell to some of the “secular stagnation” rates long associated with economies Western. But the issue of the US debt ceiling has been pushed back until after the mid-term of 2022, leaving gold prices with few black swan-type events to look forward to that could replace the narrative of real returns.

Change in gold futures (%) versus change in US 10-year yield (real) (bp):

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Source: Bloomberg

Over the past five years, gains in US real yields have generally been correlated with losses in gold prices. A simple linear regression of the relationship between the weekly change in gold prices and the weekly change in basis points for the US 10-year real yield reveals a correlation of -0.36. Generally speaking, rising real yields are bad for the price of gold, ceteris Paribas.

Gold may prove to be more resilient than other commodities

The Omicron variant may prove to be less of a health concern and more economical in the short term, meaning that growth-related commodities could struggle during the winter months in the Northern Hemisphere. Unfortunately, gold is not a commodity linked to growth but rather a safe haven; and to that extent, although gold prices may experience rocky and sideways trade in the first quarter of 22, they could still outperform industrial base metals and energy prices in the coming months.

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