Gold News

Gold Price Firm, Defies Real Rates Hitting 2009 Highs on China Deflation

GOLD PRICES held inside a narrow trading range Monday morning, shrugging off a new 12-year high in bond market forecasts for the real rate of interest – over and above the pace of inflation – as global stocks slipped amid news that the cost of living in world No.2 economy China is on the cusp of deflation, writes Atsuko Whitehouse at BullionVault.
China's consumer price index was dead flat in June from 12 months before, Beijing's official NBS data agency said, marking 0% inflation for the first time since February 2021.
Product prices among China's massive industrial sector meanwhile fell 5.4% year-on-year, the fastest rate of decline since December 2015.
Despite US inflation already being forecast by analysts to show a sharp slowdown in this Thursday's release of June data, major government bond prices continued to fall, driving borrowing costs higher, after last week's 'hawkish' minutes from the US Fed's latest policy rate rise were followed by solid if mixed data from the US labor market.
Ten-year US Treasury yields – a benchmark rate for government as well as many finance and commercial borrowing cost – steadied above 4.0% per annum, a decade high when first reached last fall.
That saw the yield on inflation-protected 10-year TIPS rise another 2 basis points from Friday's 14-year high to trade at 1.81% per annum – the highest since July 2009, midst of the global financial crisis.
Chart of Dollar gold price vs. 10-year US TIPS yield. Source: BullionVault
In recent years analysts have seen an increasingly strong negative relationship in gold versus inflation-adjusted bond yields, rising when real interest rates fell – and vice versa. 
While a perfectly negative relationship would give a reading of minus 1.00, the correlation of gold with 10-year TIPS yields today rose to -0.31 on a rolling 22-day basis, the weakest negative relationship since mid-May, when bullion prices traded above $2000 as the US debt ceiling standoff followed the mini-crisis in US regional banking. 
Gold is now 3.9% lower since then, while 10-year TIP yields have increased by more than one-third, displaying a much weaker pattern than usual.
"Looking beyond the near-term movements, we believe that positive real rates should keep downward pressure on gold," says global bank and London bullion market maker HSBC in its latest precious metals note. 
"Considering also the Fed's prolonging of the tightening cycle, we expect Gold prices to likely stay largely on the defensive this year, but with support on the downside."
Gold priced in the US Dollar today edged down by 0.1% to $1924 per ounce, while wholesale bullion in the spot market edged higher by 0.2% to £1502 for UK investors and 0.1% to €1757 for European investors.
"Gold is still holding in despite a higher US Dollar, receded geopolitical risks & macro fears, and higher real rates," says a mid-year update and outlook from strategist Nicky Shiels at Swiss bullion refining and finance group MKS Pamp.
The Dollar index – a measure of the US currency's value versus its major peers – edged higher by  0.1% on Monday after falling to 2-week lows on Friday after the US government's June jobs estimate said wage growth accelerated but failed to confirm the jump in payrolls shown by the private-sector ADP estimate last Wednesday.
The greenback has fallen 1.1% so far this year, after registering 7.9% gains in 2022.
"The Fed will keep a fall hike alive in order to prevent the market from pricing in cuts," said Gennadiy Goldberg, Head of US rates Strategy at TD Securities. 
"This is one way they're achieving tighter financial conditions."
"We expect flat-lower prices in the short-term before confirmation of a Fed pause in the second half & therefore higher trending gold prices & a lower US dollar into year-end and 2024," says Shiels at MKS Pamp, forecasting an annual average in 2023 of $1930 per ounce, raising her original forecast from January by $50 per Troy ounce.
On the geopolitical front, US Treasury Secretary Janet Yellen overnight called her 10 hours of weekend meetings with Chinese officials "direct, substantive and productive", helping put relations between the world's two largest economies on a "surer footing".
Silver meantime held firm with gold prices, trading above $23 per ounce.

Atsuko Whitehouse is the Head of the Japanese Market at BullionVault and the Editor of Japanese GoldNews.

See all articles by Atsuko Whitehouse here.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals