GOLD and BOND yields. Can they rise together?

19 de fev. de 2021

A lot of talk has been done lately regarding Gold's continuous drop and its correlation with the bond yields and rightly so. As the chart below shows, since 2015 in particular the negative (inverse) correlation of Gold (XAUUSD) with bonds (US10Y in particular used in this study) is evident. Every time the bond yields rise, Gold loses value as the two are in direct competition as low risk financial assets. Bonds in particular offer yields, a characteristic that Gold hasn't.



So as the chart above shows, the story hasn't been any different since the COVID pandemic struck the Western World in February 2020. The bonds got sold even lower and while they've been accumulating, Gold was used as a counter-inflation asset and rose aggressively. But since the August peak, we've seen Gold continuously being sold on Lower Highs, while bonds haven been rising and even above their March peak.

So will this correlation hold that will have Gold continue to fall as long as bond yields rise? The answer can be found on their historic multi-year regression, which is shown on the study's main chart.

As you see my focus is on two periods:

* (1) The Resistance break-outs. When Gold broke its 2011 Resistance (at the time All Time High) last July and when it broke above the 1996 Resistance in 2004. Those patterns are fairly similar in the sense that they both initiate a new Bull Cycle for Gold.
* (2) The start of the Quantitative Easing in 2008 to tackle the financial aftermath of the sub-prime mortgage crisis and the start of a series of stimulus to deal with the COVID19 crisis.

(1) As you see on the chart, when Gold broke above the first historic Resistance in 2004, it got immediately rejected back below it, similar to what happened on last July's break-out (and what we currently witness). At the same time, the US10Y has already entered a Channel Up from mid 2003 until mid 2007. This didn't affect Gold's trend, which as it recovered from the initial Resistance rejection, it continued its rise throughout the bond rise. Since the 2020 Resistance break-out has so many similarities with 2004, we may see Gold having a similar long-term bullish trend (a new Bull Cycle) regardless of the rising yields.

(2) That brings us to the comparison between the two "money printing" (or call it monetary easing if you like) periods on the chart. When Quantitative Easing 1 (QE1) was introduced in November 2008, Gold naturally started to rise (after an 8 month drop due to the market meltdown because of the sub-prime crisis) naturally as the market treated it as a counter to the upcoming inflation. At the same time while the yields initally fell, they started to rise (even on a very aggressive tone) in tandem with Gold. The situation brings resemblances to the current times. On March 2020 the first stimulus package was voted to offset the potential consequences (lock-downs) of the COVID-19 pandemic. Gold was again immediately bought as a counter inflation asset while the yields after an initial fall and accumulation phase, the started rising (which is still the case to this date).

The above two key landmarks on Gold's historic price action, show that Gold and bond yields can rise together, in fact in times of monetary shocks such as November 2008 and March 2020, that seems to be the norm.

Does this mean it is only a matter of time before Gold resumes its long-term bullish trend within the currenct Cycle, regardless the fact that the yields may continue to rise. In my opinion yes and the catalyst can be very much be the upcoming vote on the new stimulus package.

But what do you think? Are you expecting Gold and the bond yields to rise together in the coming months?


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