Let’s talk a little bit more about precious metals and why they’re underperforming here. As the narrative about governments,is about spending a lot of deficit spending, printing money, debasing fiat currency, sounds like it ought to be really good for precious metals.
Of course, it is easy to see that if you look directly at the observed values for real yields, they’re increasing. We know Gold’s enemy is increasing real yields. But it seems to us like inflation is just lagging. And we would expect the market to look beyond this or look across this and say, look, the inflation is coming at some point, that’s going to offset those real yields. Gold’s eventually going to move up.
We believe Inflation is coming, and it is going to be higher then what the market is currently anticipating. But it also means that we’ve got breakevens now 10-year breakevens, just around 2.2%. And that could easily be a lot higher in 6 to 12 months. So it seems like it is just the market. They need the confirmation in order to respond to it.
And also we know also how hedge funds react to primarily on momentum and technical signals. And we’ve been in a downtrend trend now since August, so there’s nothing in the price right now that’s telling a fund to get back in the market. So they’re sitting on the fence waiting for the breakout.
And right now there’s absolutely no buy signal in the gold price. We probably need to see from this level, maybe even $100 higher before that start to emerge.
But we think the narrative is the or the key drivers are still the real yields and the dollar. And the big discussion right now is and we’ve been talking about this in our notes recently that we probably needed to see some pain before the gain because we need to see yields rise to a point where the FOMC starts to blink and potentially starts to talk about some kind of measures to cap the upside on yields.
And obviously if that happens, right at the time when inflation starts to pick up, then obviously there’s only one direction for real yields and that’s back down again.
So we think the market didn’t like the speed of the the change that we have had over the past week. We broke a key level $1760-65, that old band. And that basically just attracted some additional selling but we haven’t broken any major level right now. I think the big line in the sand for me is the $1672-$1690 area.
That’s both the local lows we had may and June last year. But also it’s 61.8% retracement of the whole rally we had from March up to August. So that really is a key area that needs to hold for now.