One Chart Shows Why Gold Prices Will Decline
I am shorting gold mainly because of rising expected real yields. QE pushes inflationary expectations higher and yields lower = lower expected real yields. Reversing QE will do the opposite. Inflationary expectations will move lower and real interest rates higher. This is the result of Fed policy pushing yields higher and emerging markets and commodity price declines pushing inflation expectations lower.
The 10-year TIP yield acts as a proxy for expected real rates. It’s decline coincides with QE, a rise with the taper announcement, and generally correlates with Fed policy. It is inversely correlated with gold prices. The difference between the 10 year constant maturity rate and the 10 year breakeven inflation rate is the blue line or the inflation indexed security yield. This is the expected real yield. The inverse correlation with gold prices makes sense because gold yields nothing and is used to hedge inflation.
I’m optimistic on the U.S. economy and demand for credit as this is the channel through which money flows into an economy. The Fed has inflated potential lending or supply of credit in the banking system greatly, while the real economy has a record high net worth and declining debt to income ratios. This bodes well for continued expansion of M2. Wages should rise as the labor market tightens. I think the Fed tightening right here is a good idea and it won’t derail the recovery.