Take a close look at this chart from Goldman Sachs:
See the (until recent) correlation between an inverted US 10-year Tip (Treasury Inflation Protected bond) rate and the Comex gold price?
It’s a point Goldman Sachs has made before, noting that since at least June 2009 the gold price has tracked the changes of the inverted Tips rate faithfully — accounting as it did for changes in real-interest rate expectations.
And they’re making it again on Friday:
Given the decline in US real interest rates, we see the recent retracement in gold prices as offering a good buying opportunity, and maintain our long gold trading recommendation. Further, the decline in US real interest rates has reduced the risk to our gold forecast that the higher 10-year US TIPS yields posed at the start of this year, leading us to reiterate our 3-month gold price forecast of $1480/toz.
That is, they don’t think the recent dis-correlation will last for long and eventually gold will catch up with the TIP rate (rather than the other way around).
Here’s a little more of their thinking:
Gold prices rallied with oil prices beginning in late January as the protests in the Middle East and North Africa disrupted Libyan oil production and threatened to spread to other oilproducing countries (see Exhibit 2). The sharp rise in oil prices tempered the economic growth outlook, putting downward pressure on US real interest rates and providing further fundamental support for gold prices. This rally saw net speculative length in gold increase for the first time in 2011, helping push gold to a record nominal high close of $1,437/toz. At the same time gold-ETF holdings stabilized and gold call skew – the premium at which gold call option volatility trades – increased, suggesting that the repositioning in preparation for a potential peak in gold prices was no longer exerting a significant drag on the market.
We note, however, the subsequent events in Japan forced gold prices back from the record highs to below $1400/toz, with the largest sell-off occurring on Tuesday, when prices fell over $32/toz. This move coincided with the broad market sell-off across risky assets, but stands in sharp contrast to the move in US Treasuries and real rates, where yields fell on the day. Consequently, gold seemed caught up in the general liquidation of positions that took place on Tuesday, rather than increasing due to the flight to safety observed in the Treasury markets .
We see this move as overdone. We expect the combination of the flight to safety in asset markets in the aftermath of the Japanese earthquake as well as the continued contagion risk in the Middle East to point to sharply higher gold prices in the near term.
That bullish view, though, is only for the short term. They expect rising US real rates will have caused gold prices to peak by 2012.