How to understand the "derailment" of gold prices? The market sees a "farther future"!

Since the beginning of 2022, there has been a clear divergence in the long-term trends between gold prices and real yields, what does this mean?

Senior analyst Garfield Reynolds pointed out in a recent article that despite facing real yields as high as 2% - the highest level since 2009 (when gold prices were below $1000) - gold prices continue to rise strongly, reaching historic highs. However, under normal circumstances, such high real yields would lead to a decline in gold prices.

Reynolds believes that this situation indicates that either gold prices will quickly fall back, retracting the astonishing gains so far this year, or there will be an economic or financial crisis, leading to a sharp drop in risk assets.

Reynolds noted that gold prices reached historic highs twice in the past, both times against a backdrop of negative real yields - once during the pandemic and once in 2011-2012, when the European sovereign debt crisis followed the global financial crisis. In addition, in 1980 when gold prices soared to record levels, the 10-year nominal yield was far below the inflation rate.

Reynolds stated, "Although there may be a risk of a pullback in gold prices this year, it may also indicate that investors are beginning to worry about a major economic upheaval on the horizon." He pointed out that the peak gold price in 2011 exceeded the high point before the collapse of Lehman Brothers in early 2008.

Furthermore, Bank of America's Chief Investment Officer Michael Hartnett also observed the peculiar relationship between gold prices and real yields.

In the Flow Show report released last Friday, Hartnett stated:

Over the past 18 months, the relationship between gold and real yields has been disrupted: as shown in the chart below, with gold prices exceeding $2200 per ounce, it actually indicates that the real yield should be -2%, not the current +2%.

What is the reason behind this phenomenon?

Hartnett believes that investors are looking ahead, realizing that the market or economy cannot sustain a 5% nominal yield and 2% real yield. Therefore, they are hedging against two risks:

As CPI accelerates downward, the Fed may cut interest rates;

More importantly, they expect the Fed to eventually support U.S. government spending through Interest Cost Control (ICC), Yield Curve Control (YCC), and Quantitative Easing (QE)