The price of gold has benefited relatively well from the rise in inflation expectations and the fall in long-term bond yields (against a backdrop of central bank policy normalization and peak growth in the major economies) in recent weeks. Nevertheless, gold prices could now experience a correction in the coming weeks given the recent decline in commodity prices.
Indeed, more and more major commodities, with the exception of oil, are starting to pull back after having surged in recent months to particularly high levels in early October. As a result, investors' inflation expectations are starting to fall, with 5-year inflation expectations, which had jumped to 3% on October 26, falling to 2.86% on Monday, which is still above the average level of this summer, at 2.4%, but could mark the beginning of a turnaround in inflation expectations.
A drop in commodity prices, and thus inflation expectations, would be particularly damaging to the gold price, as it would improve the long-term economic outlook and thus long-term rates. The rise in long-term rates combined with the fall in inflation expectations would lead to a significant rise in real rates, which the price of gold would not appreciate.
A gold collapse like in 2013 seems unlikely, however, as real rates are not expected to turn positive again anytime soon. Inflation expectations will most likely remain anchored above 2% for the next few years, while long rates will remain below or near 2%. However, a simple rebound in the 10-year real rate to its high for the year of about -0.6% would be enough to push gold back to its low for the year below $1,700.
From a technical perspective, gold's trend was bullish in recent weeks, but the market seems to be struggling to make further progress since it rallied to $1800 last week. It must be said that gold is back near two major resistances: the double top at $1834 and the medium-term bearish oblique that runs through the August 2020 and May 2021 highs. This price zone around $1830 would be a technically interesting price level to sell in anticipation of a real rate hike.
(Chart Source: Tradingview 02.11.2021)
If this price zone is breached, which seems unlikely from a fundamental standpoint (unless commodity and energy prices soar again), the price of gold could eventually continue to rise to its May high at $1916.
Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.
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