Gold volatility rises as real yields collapse

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GOLD PRICE FORECAST: Falling real returns, increasing volatility to fuel the gold rally

  • The outlook for gold has improved dramatically in recent weeks thanks to falling real yields
  • Gold price volatility is expected to continue to accelerate to the upside, as indicated by the GVZ index
  • Inflation fears are mounting rapidly and are expected to overtake modest nominal interest rate hikes

Precious metals like gold and silver have traded quite favorably in recent weeks. Gold price action, for example, has now climbed almost 10% from its March 8 low of around $ 1,680 / ounce. The strong rebound staged by gold bulls appears to largely follow the downward reversal of real yields. This follows a sharp rise in inflation expectations, a trend that may persist and even exceed the cheerfulness of nominal interest rates. Even with the decline in the ten-year Treasury yield 12 basis points higher from Friday’s low, gold prices may have risen. That said, the Federal Reserve has just released its monthly survey of consumer expectations earlier today, which detailed a further rise in short-term inflation expectations from 3.2% to 3.4%.

GOLD PRICE TABLE WITH REAL TEN YEAR SURPLUS YEARS: DAILY FRAMEWORK (JUNE 02, 2020 TO MAY 10, 2021)

Several other inflation indicators have also shown pressure on building prices. Five-year inflation swaps topped 2.5% to reach their highest level since January 2018. Prices for main commodities have risen and threaten to weigh on consumers’ wallets. Business activity surveys like the ISM’s monthly PMI report have highlighted limited supply chains and production bottlenecks that risk seeping into the economy. Despite this, Fed officials have said that the rise in inflation is likely to be transient and that the central bank is prepared to support modest inflation overruns above the average inflation target of 2%. This leads to focus on the high impact inflation data due for release on Wednesday May 12 at 12:30 GMT.

GOLD PRICE TABLE WITH OVERPLACEMENT OF THE GVZ INDEX: DAILY FRAMEWORK (JULY 10, 2020 TO MAY 10, 2021)

Gold price chart with GVZ index superimposed on gold volatility

Graph by @RichDvorakFX created using TradingView

Meanwhile, a review of the GVZ index suggests that gold volatility should continue to accelerate on the upside. The GVZ index reflects 30 days implied volatility for the SDPR Gold Trust ETF ($ GLD). Generally speaking, gold price action tends to move in the same direction and maintain a positive correlation with gold volatility. By extending this generally direct relationship between gold prices and gold volatility, there might be enough bullish momentum behind the precious metal to challenge – and possibly eclipse – its 200-day SMA. A smaller reversal of expected gold volatility, however, could indicate that the bulls are looking to unwind the recent rally.

— Written by Rich dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for a real-time market snapshot

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