Gold looking for a break as real yields tumble

So far, however, yields continue to drop and with the Delta coronavirus variant once again causing lockdowns and reduced mobility in major economies such as China and the US, the market may begin to see current low yield levels potentially for longer as economic growth momentum slows and central banks become more cautious about letting the tapering genie out of the bottle. A scenario of lower yields and potentially also a weaker dollar into a slowing growth momentum could see gold once again become attractive as an additional or alternative diversifier to other assets, such as stocks and bonds.

Gold has spent the past few weeks trading within a 40 dollar range between $1795 and $1834, the latter being the 50% retracement of the June correction. A break above could initially see it target $1853 followed by the June high at $1917.

Gold’s recent failure in responding to falling real yields helped trigger renewed selling from funds during the latest reporting week to July 27. Silver meanwhile has witnessed an even greater exodus with the relative underperformance against gold moving the XAUXAG ratio back above 70 ounces of silver to one ounce of gold. As a result hedge funds recently cut their net long to just 21k lots, a 14 month low. A break back below 70 could see silver return to driving seat, thereby supporting gold in its attempt to rekindle its correlation with US real yields.