Gold and Real Yields

Gold is on track for its worst month since February, but why? The precious metal faces one of its most prominent headwinds, rising real yields. As a non-yielding asset, Gold must compete with the risk-free return that U.S. Treasuries provide. Furthermore, the difference between Treasury rates and the inflation rate provides what is known as the Real Yield. According to the St. Louis Fed Economic Research, Real Yields turned positive in October 2021 and peaked in March 2023, Gold struggled this February as Real Yields surged into that peak. After slipping into June, Real Yields have risen sharply, bringing renewed pressure on the precious metal. 

It is no coincidence the U.S. government reached a deal in June to suspend the debt limit until 2025. This enabled the government to issue new debt via Treasuries. The government’s third-quarter deficit was expected to be $750 billion, but earlier this month, they revised it to be $1 trillion. The result is more Treasury supply, driving down treasury prices, which can be seen through CME Group Treasury futures, and thus underpinning a continued rise in yields. 

CPI, a closely watched inflation gauge, for July recently came in at 3.2% y/y, nearly a two-thirds drop from last summer’s peak. However, a steady flow of Treasury issuance has lifted yields, thus reinvigorating Gold’s foe, the Real Yield. 

As we move into autumn, we must ask ourselves, has the market discounted a frivolous U.S. government? If so, when coupled with the trend lower in inflation, this sets the stage for Gold’s time to shine.