Is gold gearing up for another post-recession surge?

Gold recovery could come unstuck given rising inflation

Gold has been staging a recovery of late, with the declines seen throughout the first quarter merging into a more positive phase in April and May.

However, despite this period of strength bringing a more cheery disposition from gold bulls, there are still major questions over this precious metal.

One of the key questions is just how the rise of inflation and growth could spark higher treasury yields. There are plenty of expectations around how we could see both move higher in the coming months, with the chart below highlighting how rising inflation often results in higher rates.

Rising yields could dampen gold sentiment

With treasury yields likely to rise over the coming months, it is worthwhile looking at the long-term gold chart in relation to the US 10-year yield. What we can see is that gold prices invariably move inversely to yields (10-year yields inverted).

With the expectation that we could see yields rise in coming months, this raises questions over how that trend could hinder the recent gold resurgence.

Nonetheless, there are two sides to this coin. While it seems likely that yields could rise over the coming months, the long-term negative trajectory for yields highlights why we have seen a long-term bullish trend in gold.

The experiences in 2009 show how the post-crash rise in yields (negative on the chart) failed to move gold from its upward trajectory. Thus, the question here is whether gold declines over the coming months as yields rise, or continue to move higher in anticipation of a consistent long-term downtrend in yields.

Will gold ignore yields like 2009?

With gold clearly outperforming in the years following the 2008 financial crisis, the long-term downward trajectory of yields does point towards further upside to come for gold.

However, the question here is whether we seen the price of gold deteriorate in the face of rising yields, or simply ignore that medium-term move in anticipation of a longer-term continuation of the wider trend (like it did in 2009).

The gold chart highlights the downtrend seen over the course of the past nine months, with the recent rise bringing us back into the top end of that pattern. The resistance zone of $1851-$1892 brings about crucial region of interest that could see gold reverse lower as yields likely rise.

However, if we do see the 2009 experience play out again, we would need to see a break up through the January high of $1959 to signal such a move coming to fruition. That being said, an earlier signal can come at the 76.4% Fibonacci level ($1892) if price manages to push on through that final hurdle.

Such a move often highlights that the rally is perhaps going to bring a breakout rather than a bearish reversal. Nonetheless, with the price rising towards this key resistance zone, traders should be aware that we will soon engage an area that informs us of whether we are set to follow the recent yield correlation, or ignore it in favour of a longer-term trend as was seen in 2009.