Gold still looks cheap after accounting for inflation-adjusted yields - Pimco

Gold’s price reached a record high of $2,075 per ounce earlier this month and was last seen trading at $1,925, representing a 27% gain on a year-to-date basis. 

However, bond fund giant Pimco’s validation model, which is based on changes in the real, or inflation-adjusted yield of government bonds, suggests that the yellow metal is still undervalued. The real or inflatio-adjusted US 10-year yield recently fell to record lows below -1% earlier this month. 

Key points (source: Pimco.com)

Gold is trading near the lower end of its multi-year real yield-adjusted price range. 

The key risk is that real interest rates rise, making gold relatively less attractive. 

At current valuations, however, there is some cushion against this view, with the real-yield-adjusted gold price at the lower end of its range for the last 15 years. 

Our base case is that rates remain relatively range-bound; this outlook, combined with our view that momentum and interest in gold causes the real-yield-adjusted gold price to move higher, points to gold still having more upside from here.