Gold has been selling off sharply recently.
Investors have been reacting to a number of factors which include the following:
- The easing of tensions with respect to the Russia/Ukraine crisis - the so-called "Putin factor" (as discussed here).
- Continued strength in U.S. equity markets
- The economic slowdown in China and increased tariffs on imported gold in India have reduced physical gold demand
- The U.S. dollar has been firmer recently, which is generally a bearish sign for gold and other commodities
- Reduced fiscal and monetary policy uncertainty in the U.S. (see chart)
In spite of all the headwinds for gold, one factor remains puzzling. U.S. real rates have collapsed recently. The 5-year treasury real (inflation-adjusted) yield is now deep in the negative territory and the 7-year real yield is approaching zero. It means that those who hold 5-year treasuries right now are losing money after inflation is taken into account — even if treasury prices remain stable.
This is telling us that the monetary policy in the U.S. has become even more accommodative - in spite of the Fed's taper.
At least in theory, low or negative real yields make gold more attractive. And as U.S. inflation picks up (see chart), real yields could move even lower. Moreover, if the ECB embarks on a new round of aggressive easing (see post), the euro area monetary stance will become highly accommodative as well.
The recent weakness in gold price is inconsistent with these looser monetary conditions in the U.S. and potentially in the Eurozone. If you have a view on the topic, please answer this single-question survey.
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