Financial analyst Przemysław Radomski argues that the relationship between gold prices and bond yields is often misinterpreted, suggesting that gold may have already reached its peak despite bond yields only starting to decline.
In a comprehensive analysis published by FX Empire, Radomski challenges the common belief that falling bond yields directly lead to rising gold prices, asserting that historical data contradicts this assumption. “I have repeatedly stressed that gold tends to move inversely to real yields, rather than nominal yields, yet this discussion persists,” he stated. “Let’s explore this further.”
Radomski acknowledged that there are instances when gold prices move opposite to nominal yields. However, he maintained that only the relationship between real yields and gold is consistent. Real yields are calculated by subtracting the projected inflation rate from nominal yields, which Radomski believes investors should prioritize when evaluating gold investments.
He explained, “Consider a scenario where nominal yields are rising steadily but inflation is also sharply increasing. In this case, real yields would be falling, which could prompt a rally in gold as the metal serves as a hedge against inflation, outweighing the cost of holding it without generating interest.”
Conversely, he pointed out that nominal yields might decrease while inflation drops even faster, resulting in rising real yields and a potential decline in gold prices. “While other factors, like the USD Index, should also be taken into account, it’s crucial to focus on real yields,” Radomski said. “Understanding the dynamics of bond yields and their historical impact on gold performance is essential before drawing conclusions.”
To illustrate his point, Radomski presented three charts focused on the 2-year bond yield.
He noted, “The general perception is that gold and bond yields move in opposite directions, particularly when analyzing the period from 2000 to the present. While this timeframe includes three instances of declining yields and rising gold prices, this perspective is flawed as it overlooks the possibility that gold may have already formed a significant peak.” Radomski emphasized the importance of considering the earlier period between 1980 and 2001, when declines in bond yields often coincided with falling gold prices.
When examining both timeframes, he suggested that signals from declining bond yields are ambiguous. “This should raise some eyebrows,” he remarked, adding another layer to the analysis.
Radomski highlighted two distinct periods in which gold formed multi-year cup-and-handle patterns around 2000 and 2015. In these cases, gold and bond yields rallied concurrently after reaching local lows, with both topping out around similar times.
He noted a critical point marked by a triangle on his chart, indicating a significant rise in gold prices while bond yields were declining. “This scenario mirrored the 2008 peak, which was followed by substantial declines in gold, equities, and notably, mining stocks. Currently, we observe that bond yields are recovering after a decline, coinciding with gold’s peak,” he explained.
Radomski concluded that the recent top in gold prices likely signifies a major reversal, indicating the end of a medium-term upswing and advising investors to prepare for potential declines, particularly in mining stocks.
He cautioned that his analysis doesn’t suggest imminent declines but implies significant market shifts over the coming months. “This doesn’t negate the long-term opportunities in the precious metals market,” he clarified. However, he underscored that the relationship between 2-year bond yields and gold prices is not as bullish as commonly perceived. “There is a concerning bearish indicator here,” he warned.
Radomski emphasized the importance of timing over price movements, stating, “When the timing is right, the price will reverse.”
He also examined previous periods considered bullish for gold, particularly noting when those rallies ended. “The 2008 peak marked the end of a rally, even though yields remained stable for a time before falling,” he said. He compared this to the 2018 top, which led to an immediate decline even as gold was rallying.
“Crucially, gold typically peaked around 100 weeks after bond yield rallies ended,” he pointed out, noting that bond yields stopped rising in 2022, indicating that gold may currently be nearing a peak.
Additionally, Radomski drew parallels between 2008 and today, pointing out that both periods saw a significant low in the USD Index after approximately two years of decline. “With last week’s strong rally in the USD Index, these situations appear increasingly similar,” he remarked.
He anticipates declines, particularly among junior mining stocks, predicting that juniors will likely suffer greater losses than senior miners should the stock market decline—ascenario he believes is probable. “This may seem unlikely now, as it often does before a major market shift, but this decline in junior miners could lead to substantial gains for those strategically positioned,” Radomski concluded.
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