The two major catalysts that will propel gold to new all-time highs are veering in different directions.
US real yields are challenging fresh decade highs (not ideal for a gold rally) while the dollar is pressing against its year-to-date lows.
A breakdown in the US dollar index $DXY would no doubt send gold bugs dancing in the streets everywhere around the world.
I believe a weaker dollar remains critical to the next secular uptrend in Gold. But do real yields need to roll over as well?
I’m leaning toward no. Here’s why…
First, a quick reminder as to why real yields represent a potential headwind for Gold:
An inverted chart of the US 10y real rate looks almost identical to a chart of gold futures, as the inverse relationship between these two has been strong over the past 15 years.
So it stands to reason that rising rates would hinder any meaningful rally in Gold.
And so far, they have. Gold has gone nowhere (down roughly 10%) as the 10y real yield has risen almost 300bps since March 2022. That’s not much of a decline considering the explosive increase in the real yield. Perhaps rising real rates act more as a wet blanket rather than a significant headwind.
Regardless, real rates clearly disapprove of the next leg higher in Gold. But does it matter?
I highly doubt it does if Gold responds anything like it did in the early 2000s.
Check out the far left side of a zoomed-out view of the previous chart:
Notice the divergence between the 10y real yield and gold at the beginning of the century (and the early innings of the previous commodity supercycle).
Gold rose more than 75% from the spring of ‘04 to the summer of ‘07 as the 10y real rate climbed 150bps. Rising real rates didn’t pose much of a problem for gold bugs then. Should it now?
Honestly, I have no idea.
But I do know this…
Gold can rip higher in the face of increasing real rates. It’s in the historical record for all to see. And the 300bps rise in the 10y over the past 18 months has acted more like a Debbie Downer than an angry Bouncer.
I’m not concerned with the rise in real yields. Falling real yields are more of a want, not a need, when it comes to new all-time highs for Gold.
As Kieth Richards and Mick Jagger assured us years ago,“You can’t always get what you want / But if you try sometimes you just might find…/You get what you need.”
Gold bugs need a weaker dollar. And they just might get it in the coming weeks.
