Gold’s revival could prove temporary
The recent sharp decline in US real rates and repeated dovishness of the Fed have led to a recovery in the price of the yellow metal. However, we expect strong US economic activity and hints of QE tapering by the Fed in the second half of the year will push US real yields higher again in the coming months, penalising gold.
Long-term US real rates are a major driver of the gold price. So the recent decline in the US 10-year real rate (c. -30bps from its high on 19 March to 11 May) has boosted the gold price, which has appreciated by c. 6% (reaching our 12-month target of USD1,840 per troy ounce on 5 May on an intraday basis). Moreover, the US Federal Reserve (Fed) has been dovish recently, with many Fed officials asserting that it is premature to discuss a tapering of the bank’s quantitative easing (QE) programme. Together with Fed dovishness, fading US dollar strength (a result of the decline in real rates and the relatively strong global macro outlook), has contributed somewhat to upward pressure on gold.
But we expect US long-term real rates to rise again in the coming months, mostly due to a strong US economic recovery that is being supported by President Biden's USD1.9tn fiscal package and fast reopening. The strong possibility that the Fed starts to mention tapering of its QE programme in the second part of the year could also put some upward pressure on real rates. Seasonal and price-sensitive jewellery demand may provide little support for gold in the short term
To sum up, we are cautious on gold in the short term. Our three-month and six-month targets point to some downside potential from current levels. However, those targets are not as negative as our scenario for real rates would imply, notably because other factors could partially offset higher real rates, such as inflation and higher global risk aversion. Moreover, the explicit or implicit yield-curve-control mechanisms adopted by major central banks to deal with huge piles of debt should put a lid on long-term rates. A prolonged period of low rates should support gold in the longer term.