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The recent drop in the price of gold below $1,700/oz has illustrated its greater sensitivity to US long than short-dated real yields. Although the yellow metal has nudged back up above this level, strategists at Capital Economics expect XAU/USD to fall back to an even lower level as the US real yield curve steepens more.

See –  Gold  Price Analysis: XAU/USD flirts with the $1676 March low, risking a slide to $1616 – Commerzbank

Gold recovers and recaptures the $1,700 level

“In the past, short and long-dated real Treasury yields have often moved in the same direction, with the result that both variables have had a close inverse relationship with the price of gold. Since the good news on vaccines against COVID-19 began to emerge in November, however, short and long-dated real Treasury yields have moved in opposite directions.”

“The pivoting of the real yield curve has been accompanied by a slump in gold. We think this is logical. Admittedly, gold is not like a regular US Treasury Inflation-Protected Security (TIPS) with periodic cash flows and a principal to be repaid when it matures on a given date. Accordingly, the concept of duration is not something that can be readily applied to the metal. Nonetheless, gold is arguably like a hypothetical real zero-coupon perpetual bond, whose duration is potentially infinitely long. With that in mind, it probably should track more closely the real yields of long than short-dated Treasuries.”

“Our expectation is that the real Treasury curve will continue to steepen. Indeed, we suspect most of the ~50bp increase we project in the nominal yield of 10-year conventional Treasuries between now and the end of this year will result from a higher real yield. We expect this to heap more pressure on the price of gold, which we doubt will get any offsetting boost from a flight-to-safety given our view that the US stock market will stay strong this year.”  

“Our end-2021 forecast for the price of the yellow metal is $1,600/oz.”