Historically, gold prices have often come under pressure in the early stages of a slowdown as central bank policy is still tightening or is tight and real interest rates are rising. Of course, this dynamic reverses when policy rates are cut. We expect a further lift to real interest rates this year, particularly as inflationary risk fades in 2H22. As such, additional liquidation of exchange-traded funds can be expected. We advise protecting the downside to longer-term holdings in the yellow metal into year-end. However, we see opportunities to be more positive though 2023 as the Federal Reserve pivots to an easier stance and the US dollar weakens.
Gold is often regarded a perpetual zero coupon bond. It therefore thrives in an increasingly negative real interest rate environment and struggles when a rates trend towards positive real rates.
The 10-year TIPS yield is the only easily tradable real inflation measure and, even then, is heavily influenced by Fed buying. It has risen by 150 basis points in the last six months and remains in a reasonably consistent uptrend but is still well below the 2018 peak.
Gold is back testing the region lows from March 2021 and the 1000-day MA. It should be pointed out that this long-term secular trend mean is not nearly as reliable as a potential area of support as it is for stocks. A clear upward dynamic will be required to pressure shorts and signal a low of at least near-term significance.