Gold prices clocked 3-1/2 month high of $126387/Oz on Monday. The yellow metal is on a tear since early January despite flat action in the treasury yields and record rally in the US stocks.
The 2-year treasury yield, which is more sensitive to short-term interest rate/inflation expectations, topped out on Dec 15 at 1.3% and since then has been restricted to a narrow range of 1.15% to 1.305. During the same time period, gold rallied 12.30%. Such a sharp rally in the yellow metal is usually a result of a sharp decline in the yields.
On similar lines, gold’s performance is surprising if we take into account the record run in the US stocks. S&P 500 has rallied from 2225 to 2370 levels in the New Year. The stellar performance in stocks is usually accompanied by a reduced demand for the safe haven assets like gold.
What’ supporting gold?
The metal could be tracking the rising inflation expectations in the US. The 5-year, 5-year forward inflation expectation rate has jumped from 1.11% (June 2016 low) to 2.22% (Jan 2017 high). The yellow metal has always had a strong positive correlation with the inflation expectation rate.
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