As my colleague John Hardy writes in his latest FX Update: “The argument here is that the Democrats are set to take back the presidency and the Senate, therefore paving the way for a massive multi-trillion stimulus passed in the first one hundred days of a Biden administration, taking US inflation much higher while leaving the Fed policy rate pegged near zero. The US dollar has clearly been driven by the market’s pricing of future inflation. The Biden argument seems the more plausible driver here, and US rates spiked all along the curve, but most aggressively at the long-end yesterday, with the 10-year trading above 0.75% resistance and the 30-year above 1.50%, a notable chart level. Also, the stronger the apparent edge that the Democrats are achieving in the polls, the less likely that Trump’s claims of a fraudulent election will be able to drive “contested election” uncertainty for any appreciable length of time after Election Day.”
The recovery back above $1900/oz following the recent correction to $1850/oz is signaling the rally could have further to go, not least considering the continued and strong demand for exchange-traded funds backed by bullion. Investors, asset managers and pension funds are increasingly waking up to the need for tail-end protection against inflation and it has led a continued increase throughout the year to the current record above 111 million ounces. Most noticeable was the continued inflows in August and September despite falling prices in both months.
From a gold perspective the yield rise has if anything been supportive with the rise in nominal yields primarily being fed by rising breakevens thereby leaving real yields close to unchanged. Real yields look set to fall deeper into negative territory as breakevens rise, not least considering the Federal Reserve’s attempt to keep nominal yields capped.