Gold Weakness Inconsistent With Loose Monetary Conditions In The U.S.
Sober Look | Jun 02, 2014 01:25AM ET
Gold has been selling off sharply recently.
Investors have been reacting to a number of factors which include the following:
1. The easing of tensions with respect to the Russia/Ukraine crisis - the so-called "Putin factor" (see chart )
In spite of all the headwinds for gold, one factor remains puzzling. US real rates have collapsed recently. The 5-year treasury real (inflation-adjusted) yield is now deep in the negative territory and the 7-year real yield is approaching zero. It means that those who hold 5-year treasuries right now are losing money after inflation is taken into account - even if treasury prices remain stable.
This is telling us that the monetary policy in the US has become even more accommodative - in spite of the Fed's taper.
At least in theory, low or negative real yields make gold more attractive. And as US inflation picks up (see post ), the euro area monetary stance will become highly accommodative as well.
The recent weakness in gold price is inconsistent with these looser monetary conditions in the US and potentially in the eurozone.
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