2010-09-13

In the long-run a low real interest rate is bullish, especially for gold

Investor look to developments in the US bond market — the US 10-year government bond (UST) yield appears to have broken out of the downward channel it has traded in since the start of April. Currently the 10y UST yield is at 2.75%.

We also look at the US 10y inflation-linked bond (TII) yield which has remained almost unchanged at 1% over the past few weeks, indicating the market expects US real yields to remain low for a long time. In the long-run a low real interest rate is bullish, especially for gold.
A rising nominal real yield (from the 10y UST) and a constant real yield (from the 10y TII) implies higher inflation expectations (breakeven inflation) in the US. Current breakeven inflation in the US is still low, but it has reversed it’s downwards trend and currently stands at 1.75% (after bottoming at 1.45% mid-August).

This is important for precious metals, not necessarily because we expect inflation to run rampant and push precious metal prices higher, but it signals a move away from deflation fears. A world where debt is an issue, falling prices will only amplify the problem.

At the moment gold is finding strong resistance at $1,260 level. This may well continue for now. We expect physical demand to remain strong on price dips. As a result we expect gold to find support on pull-backs of $10—$15. We continue to see the yellow metal heading towards $1,300 in Q4:10. Gold support is at $1,251 and $1,247. Resistance is at $1,260 and $1,265.

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