Gold vs yields: what changed?

00:00:00: The rule for gold investors was relatively simple.

00:00:03: When real yields went up, Gold went down and when real yields go down, Gold goes up.

00:00:10: But since in the year of two thousand twenty-two something has changed Real yields surge instead of falling.

00:00:17: gold kept climbing.

00:00:19: So what broke the relationship between gold and yields?

00:00:22: Why did two thousand twenty-two become such an important turning point in gold market, And perhaps more importantly does that old relationship between Gold and real yield still matter for where gold goes from here?

00:00:36: so hi I'm Ipega Skardishkaya!

00:00:39: In this special episode of Market Talk we are going to look at What changed change and what it could mean for gold prices in the longer run.

00:00:50: But before we do, please keep in mind that opinions are my own and this is not financial advice!

00:01:11: So when real yields rise, the opportunity costs of holding their non-interest bearing gold increases and some investors move from Gold into bonds especially toward inflation protected government bonds that actually offer a better return.

00:01:28: Then When Real yields fall or become negative The reverse happens.

00:01:32: Holding government bonds becomes less attractive, while holding gold costs investors less in terms of foregone interest and the latter helps gold recover.

00:01:42: Now until two thousand twenty-two analysts could use real yields as one of the principal factors for explaining moves in gold prices and valuation models.

00:01:51: but after two thousand twelve this relationship started to weaken.

00:01:56: So the chart that I'm bringing here illustrates a relationship between gold and U.S ten-year yield, the real yield mind you, grade dot stand for Gold & U. S Ten Year Yield Observation Between January two thousand three and February two thousand twenty-two And red dot stands for The Period Following March Two Thousand Twenty-Two Today.

00:02:19: Now note that the vertical axis you see here for goal prices use a logarithmic scale, which means equal vertical distances represent equal percentage changes not equal dollar changes.

00:02:31: But anyhow what we are looking at is how do two move relative to each other?

00:02:36: We're looking at what happens when goal prices yield rise or dayfall.

00:02:40: And what we observe here is that there's a big difference between how the gray and red dots behave.

00:02:46: Because grey dots, which belong to period before year of two thousand twenty-two remember match traditional negative relationship where lower real yields are supportive for gold price while the red dot, which belonged post year of one hundred and twenty-one period today show.

00:03:02: even though the real yield spiked from one half percent level due to Ukrainian war led energy crisis Gold prices just kept rising.

00:03:12: In other words, gold began trading at a notable premium to the price predicted by real yields.

00:03:19: It's gained when it shouldn't have and its gain more than expected what it did.

00:03:23: Now.

00:03:23: that does not mean yields have become irrelevant.

00:03:26: in short one, gold continues display of negative relationship with real yields.

00:03:31: But longer term dynamics warned out several forces outside yield how they became powerful enough overwhelm that negative effect and weaken the traditional negative relationship.

00:03:42: longer horizons.

00:03:43: So the obvious question that you must be asking yourself is what happened in two thousand and twenty-two?

00:03:48: Well, two things marked two thousand twenty-twenty-two.

00:03:50: The beginning of it Russia invaded Ukraine And the US froze Russian assets and the Fed began an aggressive rate hiking cycle That year.

00:03:58: now for the broken relationship between the U.S Heels and gold the freezing off to russian reserves was certainly more important As if both a new reality to the game!

00:04:12: And the foreign governments, US dollar and euro reserves could be immobilized by Western sanctions.

00:04:18: That's a big deal because in reaction to that, foreign central banks around the world started replacing their US treasury holdings with gold.

00:04:28: regardless of what happened on the yields front Later on, the US dollar's debasement certainly emphasized a move persistently above target inflation in the

00:04:37: U.S.,

00:04:38: very large and rising fiscal deficits and rapidly growing public debt trade and geopolitical tensions of course, and growing questions about federal reserves independence encouraged so-called debasements where appetite for US dollars and US treasuries weakened.

00:04:55: The weaker U.S.

00:04:55: dollar pushed gold price higher in terms of U. S. dollars until early two thousand twenty six and since then rising yields and stronger US dollar way on Gold, but at the same time long-term investors especially big investors like governments and central banks were less price sensitive for continue to flock in.

00:05:14: The second quarter of two thousand twenty six indeed marked the biggest increase in central bank gold purchases despite falling prices and later will not be selling to go back to US treasuries because the yields rise.

00:05:25: on the contrary they would likely stay away, due high government spending and unsustainable debt growth.

00:05:33: So if we summarize, the way foreign investors especially big investors like central banks and governments viewed US treasuries weaken negative relationship between yields and gold prices.

00:05:44: The letter is very much notable since to year thousand twenty-two Gold became less sensitive.

00:05:49: changes in yield since then And there's no reason for this setup change as long as fundamentals that have supported the goals really not changed.

00:05:58: If anything they simply strengthened.

00:06:00: Central Banks continue reduced their exposure to US treasuries as gold remains the most plausible alternative for reserve diversification, rising inflation risk and exploding

00:06:11: U.S.,

00:06:14: etc.

00:06:16: So Gold is still gold?

00:06:17: The price could react many factors in this short run and the latter can lead to two-sided volatility in gold prices.

00:06:24: but long term conviction remain strong?

00:06:27: for a better and stronger goal, and the outlook remains comfortably positive.

00:06:32: So this is all for This Focus on Gold.

00:06:35: I'm Ipeko Skardeshkaya And thank you for joining me.

00:06:38: Thank you to all your beautiful and supportive comments For these educational episodes!

00:06:43: I hope that one on gold and yields has been helpful.

00:06:46: It's been insightful as well so please do not hesitate To leave your comment your reactions and questions below as usual.

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00:07:13: So I will meet again very soon and until then good day trading and goodbye.

00:07:22: See if these indigital assets are volatile and not suitable for everyone.

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