Monday Markets — What’s Up with Gold?

Monday, 18 January 2021
Wollongong, Australia
By Greg Canavan

[4 min read]

I’m going to try something a little different in Monday’s Insider from now on.

Under the broad heading of ‘Monday Markets’, I’m going to write about a specific asset market or sector that is either an opportunity or a risk.

Today, I’m going to write about gold. It’s been all over the place lately. But from week-to-week, it could be anything; stocks, stock sectors, commodities, bitcoin, bonds…whatever is relevant.

And by that I don’t just mean what is popular. There’s no point talking about what investors already know and have priced in. As much as possible, I want to try and give you insights here that aren’t priced in, or at least aren’t talked about much.

If you have ideas or some thoughts on what you want to see covered, drop us a line at

But today, we’re talking gold.

Gold has certainly been volatile lately. Take a look at the chart below…

Source: Optuma

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In November it dropped sharply, and looked like it was headed much lower. But it quickly turned around. Then, it began to move out of that wedge-shaped consolidation pattern, and appeared to be moving higher.

Then, more selling!

It’s now back at that support level. Will it hold? Or are prices heading into the US$1,700s again?

To help us answer that question, let’s look at what really drives gold prices: Interest rates. Or, to be precise, REAL interest rates.

The real interest rate is the nominal rate minus inflation. So if nominal bond yields are at 1%, and inflation is 2%, the real interest rate is minus 1%. The gold price is highly correlated to real yields. So when the real yield declines, gold prices generally rise. When real yields rise, gold prices generally fall.

With all the ‘inflation is coming’ talk and expectations, nominal bond yields in the US have increased from their lows of around 0.50% last year, to currently sit around 1.09% on the 10-year.

The only way that can be fundamentally bearish for gold is if nominal yields rise faster than inflation expectations. If this happens, then real yields will rise and put pressure on the gold price.

Is that the case?

Well, let’s have a look at a chart of the real 10-year US Govt bond yield.


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This is a long-term chart. But if you look at the last few years, the real 10-year bond yield peaked in late 2018. They’ve been heading lower ever since.

Now, if you take a look at the gold price going back to 2018, you can see that it bottomed in August. This was just before the peak in real yields, but gold obviously saw the turn coming. As you can see, gold started to trend higher as real yields began to trend lower. 

Source: Optuma

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The interesting thing to note here is that the gold price peaked in August 2020. It has spent the past six months correcting. But apart from a small blip last year, real yields are yet to move higher. They are currently at minus 0.99%.

This next chart gives you a better illustration of this divergence, and just how correlated gold and real yields are over the long term.

It shows the Treasury Inflation-Protected Securities (TIPS) ETF along with the gold price. The price of TIPS securities rise when real yields decline. As you can see, TIPS, represented by the black line, remain near all-time highs.

The gold price has diverged though. It’s started to decline while TIPS prices have held up.

Source: Optuma

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In the same way gold sniffed out the turn in the market in 2018, is its price falls pre-empting a turn now?

That’s a question that no one knows.

There is a possibility it might be.

From past, post-2008, experience, we know that massive government and central bank stimulus leads to a momentary ‘reflation’ of the economy. This leads to an increase in real yields for a short amount of time.

But the economy cannot handle higher real yields for any length of time because of the huge and increasing amounts of debt that it has to carry. Following the massive post-COVID debt injection, I would argue the global economy is even more susceptible to a rise in real interest rates.

If — and it’s a big if — these vaccines work (and don’t kill people), then the global economy could do well over the next few years as ‘reflation’ takes hold. In this instance, you could see a modest increase in real yields.

But this would just sow the seeds for the next downturn and deflationary impulse. Real yields would plunge again and go deeply negative. This would obviously be very bullish for gold.

Or, perhaps this reflation won’t have much kick. After all, the global economy is only being held up by big increases in government debt levels. That’s not exactly sustainable.

Or maybe the gold divergence is due to ‘everyone’ buying bitcoin instead? There can be little doubt that the tremendous performance of bitcoin over the past few months has taken capital away from gold.

If this is the case, gold is a buying opportunity now…

Either way, though, in this broken monetary system, gold looks like a great long-term hedge. You just need to be able to ride out the volatility.

My advice to subscribers of Crisis & Opportunity is to accumulate during this period of weakness. It might be painful in the short term, but I think it will be worth your while in the long run.

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By Murray Dawes


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Murray Dawes,
Editor, Pivot Trader