Gold Rebounds as US Inflation Data Cools Record-High Real Rates

GOLD rebounded almost $100 per ounce on Friday, slashing steep weekly losses after US inflation data matched analyst forecasts, cementing expectations that the Federal Reserve will raise short-term interest rates at next Wednesday's policy meeting but easing longer-term bond yields from yesterday's fresh multi-decade highs.

Yields on 30-year US Treasury debt ended last night at 5.37% per annum, the highest since July 2004, while inflation-protected 30-year Treasury securities offered 3.06% in real interest.

That's the highest on record since those long-dated TIPS were re-introduced in 2010.

Bond yields eased across the board Friday following the new US data. Unadjusted for seasonal factors, it said consumer price inflation in the world's largest economy held at 3.4% per year in August, unchanged from July's pace of CPI inflation, with the 'core' measure excluding food and fuel prices slowing as analysts expected to 2.4%.

Dipping through $4300 per troy ounce the moment before today's CPI data was released, gold leapt to almost $4394, cutting its week-on-week loss from 2.7% to 0.7% as London's 3pm benchmarking auction approached.

The price of silver meantime jumped more than $2 per ounce, spiking from a 3-week low near $63 after fixing at London's midday auction with a 4.6% loss from last Friday lunchtime.

"Gold has broken its old relationship with real yields," said an article this time last week in the Financial Times from Swiss bullion giant UBS' investment bank chief strategist Bhanu Baweja, noting how gold's typically inverse relationship with the real rate offered by 5-year US TIPS broke down in 2022 following the Western sanctions freezing Russian assets over the Kremlin's invasion of Ukraine.

"If $630bn held in Treasuries, Bunds, gilts and other bonds could become inaccessible overnight, what constituted money? Reserve and asset managers globally [said] their answer was gold."

But while the turnaround in gold's 13-week correlation with 5-year TIPS yields has amounted to 0.72 percentage points from the pre-2022 median of minus 0.58 to plus 0.13, the precious metal's correlation has flipped most violently against 30-year TIPS' yields, surging by 1.16 percentage points to show a positive r-coefficient of 0.70 over the past 4.5 years.

That means, as BullionVault's chart shows above, that on the pre-2022 relationship, real yields on 30-year US Treasury debt would now need to be almost 5 percentage points lower to justify today's gold price close to $4400.

"Gold pays no income, so rising real yields can increase the opportunity cost of holding it," says UK stockbroker Charles Stanley.

But with the price of government bonds facing "a structurally bearish case in the long end [through] fiscal dominance, AI/tech [debt] supply [and] sticky inflation," says a note from precious metals strategist Nicky Shiels at Swiss bullion refiners and finance group MKS Pamp, "market intervention risk keeps lifting the gold floor as a policy hedge" after this week's super-sized US Treasury's bond buyback of $6 billion in longer-dated debt.

"Scott Bessent fails to break ‘fever’ in US bond market," says the front-page of the Financial Times, calling it "insufficient to stem the recent surge in borrowing costs" as fears over Washington's long-term debt sustainability grow.

Today's inflation data saw betting on next week's Fed decision meanwhile leap to price a quarter-point rise to a ceiling of 4.00% per annum as an 85% chance. That put expectations for 'no change' at the September meeting down to the weakest since mid-July, when 1-in-4 of the market backed a half-point hike from the US central bank according to derivatives exchange the CME's FedWatch tool.