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Gold plunges, and bond yields are to blame

Recent price action in gold and U.S. bond markets confirms that in the present environment, higher U.S. bond yields are the mortal enemy of bullion investors.

Stronger-than-expected U.S. economic data has sent 10-year U.S. Treasury yields higher in recent days. At the same time, the gold spot price has fallen sharply.

The chart below illustrates how the yields-up-gold-down trend fits the historical pattern. In simple terms, gold and bond yields move in opposite directions because they compete for the attention of investors looking for safe havens.

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When bond yields are low and declining, as they've been for most of the post-crisis era, gold is more attractive to investors looking for an alternative to equity markets.

In June 2010, for instance, an investor who was skeptical about future equity performance had a choice between a 10-year U.S. Treasury bond yielding less than three per cent, or an investment in gold at $1,242.45 (U.S.) per ounce.

Importantly, the bullion price had rallied more than 34 per cent in the 12 months prior. In hindsight, it's no surprise that the gold price continued to shoot higher.

September 2012 marked the recent peak for gold at $1,772, and the low for bond yields. From that point yields have climbed – becoming more attractive to investors – and the gold price has fallen.

The future for the gold price is very much dependent on U.S. bond yields. If this week's surprisingly positive data on U.S. retail spending and the Consumer Price Index start a trend, Treasury yields should continue higher in expectation of increasing economic activity and inflation pressure. The higher yields will also attract investors away from gold, and the bullion price is likely to fall.

Follow Scott Barlow on Twitter at @SBarlow_ROB.

Gold spot (U.S. dollar) vs U.S. Treasury 10-year

SOURCE: Scott Barlow/Bloomberg

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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