Gold is on course to register its first annual decline in three years. With the Fed ready for policy rate lift-off and global liquidity conditions gradually tightening, headwinds from rising US real yields may result in a bearish tilt to gold’s medium-term outlook, rather than a complete reversal of the long-term uptrend, economists at ING report.
Real yields to rise, weighing on gold prices
“Gold still trades at a premium over fair value versus TIPS due to broadening US inflationary pressure and perhaps incorporating some risk premium from the uncertainties around the Omicron variant and geopolitical risks in eastern Europe. Looking ahead, we see the risk of the Fed concluding its QE tapering program in the first quarter of 2022 with at least two rate hikes in the second half of next year.”
“Like the Fed, we believe inflation will gradually slow through 2022 while nominal Treasury yields should rise as US monetary policy and global liquidity conditions gradually tighten. This should result in real yields starting to rise, and as a result, weigh on gold prices. However, the ultimate goal would be to get to a zero real rate in the 10yr, but it may not be until 2023 and beyond before that happens. This, compounded with some lingering risks on the virus front, may still offer some support to gold in the next few months.”
“We are of a directional bearish view towards gold for the medium-term, rather than a complete reversal of the long-term uptrend.”