Image 1: Charting Gold Futures Prices Against the Inverse of 10-Year Treasury Yields

Image 1: Fundamentals: The supply and demand in the Oil market as per EIA
Source: Bloomberg

There has been an uptick in conversations in the past week or two about the re-emergence of inflation and the more hawkish/less dovish commentary from FOMC officials. This may have led the market to price rate cuts out of the Fed Funds futures market. The CME FedWatch Tool has an 87% chance of a cut by December of this year. As a reminder, there were more than six rate cuts priced into the market at the start of the year. This has led to a re-pricing of Treasury products across the curve with the 10-year yield breaking above resistance at 4.5% and heading higher. Adding to this pressure is the $1 trillion of coupon issuance that is set to come in the next three months and this is only exacerbated by the weakness of the Yen, as Japan is the largest foreign holder of Treasuries. 

What does this all have to do with the price of gold? For the better part of the last 20 years, there has been a reasonably good inverse relationship between the price of gold and interest rates. As rates went lower, and the cost of carry was less, gold benefited. As rates moved higher, and carry got more expensive, gold suffered. This has all started to break down in the past two years and has recently gotten to quite the extreme as gold prices head to all-time highs while yields are also heading higher, a situation that is not common in these markets.


Image 2: Real 5-Year Treasury Rates vs. the Generic Front Month Gold Price

Image 2: Real 5-Year Treasury Rates vs. the Generic Front Month Gold Price
Source: Bloomberg

Perhaps a more traditional view of the rates vs. gold relationship compares real interest rates and gold prices. Again, it is an inverse relationship, as rates go higher, gold suffers and vice versa. In this graph, I have used the real rate on Bloomberg which is 5-Year Treasuries less CPI. There are of course other measures to consider, but all suggest a similar move. Real rates have gone higher, moving from previously sharply negative levels post-Covid-19, to a more normal level above 1% positive. However, in this hiking cycle, gold prices have again disconnected from this part of the rates market as well.


Image 3: Gold Front Month Futures vs. Bitcoin Front Month Futures

Image 3: Gold Front Month Futures vs. Bitcoin Front Month Futures
Source: CME Group

What might be happening is that the Gold market is sniffing out a stimulus-led response from the government. Pro-cyclical fiscal balances taking the debt higher have led to a market concern that the Fed has monetized the Trump and Biden deficits. Gold is not the only market that has sensed this as bitcoin also benefits from the fiscal largesse. You can see both gold and bitcoin moving higher over the past six months as the fiscal spending concerns have come to the forefront. The disconnect over the past month may be due to the concerns in the Middle East, as gold is seen as a safe haven while bitcoin may be viewed, by institutional money at least, as a risky asset.


Image 4: Generic Gold Futures Prices vs. the U.S. Debt to GDP Ratio

Image 4: Generic Gold Futures Prices vs. the U.S. Debt to GDP Ratio
Source: Bloomberg

Image 5: Daily Ichimoku Chart for Gold Futures Prices


Image 6: Commitment of Traders Chart for Gold Futures


Image 8: CVOL, Skew, UpVar and Underlying for Gold


Image 9: Implied Volatility by Strike for Weekly Gold Options


Image 10: Expected Return and Greek for a Long G2WK4 2345 Put Funded by a Short 2415-2445 Call Spread